Argos Therapeutics
ARGOS THERAPEUTICS INC (Form: 10-Q, Received: 11/14/2016 13:34:50)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________

 

FORM 10-Q
_________________

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 001-35443

 

ARGOS THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware 56-2110007

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

   

4233 Technology Drive

Durham, North Carolina

27704
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (919) 287-6300

 

No changes

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer x   (Do not check if a smaller reporting company) Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

 

As of November 7, 2016, there were 41,246,954 shares outstanding of the registrant’s common stock, par value $0.001 per share.  

 

 
 

ARGOS THERAPEUTICS, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarterly Period Ended September 30, 2016

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION
Item 1.   Financial Statements 3
    Condensed Consolidated Balance Sheets (unaudited) 3
    Condensed Consolidated Statements of Operations (unaudited) 4
    Condensed Consolidated Statements of Comprehensive Loss (unaudited) 5
    Condensed Consolidated Statements of Cash Flows (unaudited) 6
    Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 38
Item 4.   Controls and Procedures 38
 
PART II. OTHER INFORMATION
Item 1.   Legal Proceedings 39
Item 1A.   Risk Factors 40
Item 6.   Exhibits 69
 
Signatures 70
Exhibit Index 71

 

Argos Therapeutics®, Argos® and Arcelis™, the Argos Therapeutics logo and other trademarks or service marks of Argos appearing in this Quarterly Report on Form 10-Q are the property of Argos Therapeutics, Inc. The other trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

 

 

 

 

  2  
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ARGOS THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

    December 31,
2015
  September 30,
2016
Assets                
Current assets                
Cash and cash equivalents   $ 6,163,144     $ 69,283,934  
Short-term investments     1,003,160        
Restricted cash     740,000       740,000  
Prepaid expenses     740,173       1,126,509  
Other receivables     73,818       119,257  
                 
Total current assets     8,720,295       71,269,700  
Property and equipment, net     22,306,384       37,489,337  
Other assets     11,020       11,020  
                 
Total assets   $ 31,037,699     $ 108,770,057  
                 
Liabilities and Stockholders’ (Deficit) Equity                
Current liabilities                
Accounts payable   $ 2,907,683     $ 3,567,440  
Accrued expenses     3,676,846       7,457,958  
Current portion of notes payable     1,578,284       9,912,628  
Current portion of manufacturing research and development obligation           2,876,389  
Current portion of capital lease obligations           119,273  
                 
Total current liabilities     8,162,813       23,933,688  
Long-term liabilities                
Long-term portion of notes payable     30,728,258       21,588,478  
Long-term portion of manufacturing research and development obligation     7,777,436       5,193,499  
Long-term portion of facility lease obligation     7,249,627       7,390,000  
Long-term portion of capital lease obligations           2,230,444  
Deferred liabilities     5,321,000       6,751,000  
Warrants           21,548,019  
Commitments                
Stockholders’ (deficit) equity                
Preferred stock $0.001 par value; 5,000,000 shares authorized as of December 31, 2015 and September 30, 2016; 0 shares issued and outstanding as of December 31, 2015 and September 30, 2016            
Common stock $0.001 par value; 200,000,000 shares authorized as of December 31, 2015 and September 30, 2016; 21,641,509 and 41,243,314 shares issued and outstanding as of December 31, 2015 and September 30, 2016, respectively     21,642       41,243  
Accumulated other comprehensive loss     (138,245 )     (130,695 )
Additional paid-in capital     250,873,875       336,856,362  
Accumulated deficit     (278,958,707 )     (316,631,981 )
                 
Total stockholders’ (deficit) equity     (28,201,435 )     20,134,929  
                 
Total liabilities and stockholders’ equity   $ 31,037,699     $ 108,770,057  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

  3  
 

 

ARGOS THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

    Three Months Ended September 30,   Nine Months Ended September 30,
    2015   2016   2015   2016
                 
Revenue   $ 158,349     $ 146,756     $ 444,511     $ 781,828  
                                 
Operating expenses                                
Research and development     17,227,405       9,340,018       48,079,221       28,006,178  
General and administrative     2,689,398       3,010,518       7,969,957       9,375,021  
                                 
Total operating expenses     19,916,803       12,350,536       56,049,178       37,381,199  
                                 
Operating loss     (19,758,454 )     (12,203,780 )     (55,604,667 )     (36,599,371 )
Other expense                                
Interest income     4,757       20,586       23,172       24,399  
Interest expense     (324,871 )     (448,288 )     (1,645,308 )     (1,482,943 )
Decrease in fair value of warrants           385,394             385,394  
Other expense           (753 )     (2,798 )     (753 )
                                 
Other expense, net     (320,114 )     (43,061 )     (1,624,934 )     (1,073,903 )
                                 
Net loss   $ (20,078,568 )   $ (12,246,841 )   $ (57,229,601 )   $ (37,673,274 )
                                 
Net loss per share, basic and diluted   $ (0.97 )   $ (0.32 )   $ (2.81 )   $ (1.30 )
                                 
Weighted average shares outstanding, basic and diluted     20,704,163       37,938,213       20,333,835       28,903,427  

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

  4  
 

 

ARGOS THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

 

    Three Months Ended September 30,   Nine Months Ended September 30,
    2015   2016   2015   2016
Net loss   $ (20,078,568 )   $ (12,246,841 )   $ (57,229,601 )   $ (37,673,274 )
                                 

Other comprehensive (loss) gain

                               

Foreign currency translation (loss) gain

    (11,320 )     (858 )     (20,813 )     7,279  
Unrealized gain on short-term investments     4,321             11,684       271  
                                 
Total comprehensive loss   $ (20,085,567 )   $ (12,247,699 )   $ (57,238,730 )   $ (37,665,724 )

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

  5  
 

 

ARGOS THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

    Nine Months Ended September 30,
    2015   2016
Cash flows from operating activities                
Net loss   $ (57,229,601 )   $ (37,673,274 )
Adjustments to reconcile net loss to net cash used in operating activities                
Depreciation and amortization     519,026       697,730  
Compensation expense related to stock options     2,860,867       3,759,947  
Common stock issued as payment for services           220,424  
Interest accrued/(capitalized) on long-term debt     125,249        
Amortization of debt discount     80,838       105,612  
Amortization of debt issuance costs     207,923       25,503  
Decrease in fair value of warrant liability           (385,394 )
Loss on disposal of equipment     2,799       753  
Changes in operating assets and liabilities:                
Prepaid expenses and other receivables     (34,968 )     (431,776 )
Other assets     (381,033 )      
Accounts payable     566,066       (270,890 )
Accrued expenses     3,051,159       2,304,181  
Deferred liabilities     1,485,000       (110,000 )
Manufacturing research and development obligation     1,274,759       292,452  
                 
Net cash used in operating activities     (47,471,916 )     (31,464,732 )
                 
Cash flows from investing activities                
Purchase of property and equipment     (7,709,337 )     (10,037,447 )
Receipt from restricted cash account securing letter of credit     585,000        
Purchase of short-term investments     (2,696,841 )      
Proceeds from maturity of short-term investments     18,702,000       1,003,431  
                 
Net cash provided by (used in) investing activities     8,880,822       (9,034,016 )
                 
Cash flows from financing activities                
Proceeds from sale of common stock and warrants     8,570,000       105,213,087  
Proceeds from exercise of common stock warrants           299,932  
Proceeds from issuance of notes payable and warrants     12,500,000        
Stock issuance costs           (2,159,587 )
Payments on notes payable and capital lease obligations     (30,711 )     (37,471 )
Payment on facility lease obligation           (100,000 )
Proceeds from exercise of common stock options     179,227       133,571  
Proceeds from exercise of employee stock purchase plan rights     207,233       262,819  
Net cash provided by financing activities     21,425,749       103,612,351  
Effect of exchange rate changes on cash     (20,566 )     7,187  
Net (decrease) increase in cash and cash equivalents     (17,185,911 )     63,120,790  
Cash and cash equivalents                
Beginning of period     37,223,590       6,163,144  
End of period   $ 20,037,679     $ 69,283,934  
                 
Supplemental disclosure of cash flow information                
Cash paid for interest   $ 863,977     $ 1,757,812  
Supplemental disclosure of noncash investing and financing activities                
Stock issuance costs included in accounts payable and accrued expenses   $     $ 459,825  
Interest capitalized on construction-in-progress   $ 548,824     $ 617,757  
Purchase of property and equipment included in accounts payable and accrued expenses   $ 1,525,308     $ 2,612,888  
Recognition of asset and facility lease obligation related to construction of new property   $ 4,240,437     $ 240,373  
Property recognized under capital lease obligations   $     $ 2,372,880  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

  6  
 

 

ARGOS THERAPEUTICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Organization and Basis of Presentation

 

Argos Therapeutics, Inc. (the “Company”), was incorporated in the State of Delaware on May 8, 1997. The Company is an immuno-oncology company focused on the development and commercialization of individualized immunotherapies for the treatment of cancer using its Arcelis technology platform. The Company’s most advanced product candidate, AGS-003, is being evaluated in the pivotal ADAPT Phase 3 clinical trial (the “ADAPT trial”) for the treatment of metastatic renal cell carcinoma (“mRCC”). The Company is also developing a separate Arcelis-based product candidate, AGS-004, for the treatment of HIV, which is currently being evaluated in an investigator-initiated clinical trial in combination with vorinostat aimed at HIV eradication in adult patients.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Accordingly, the statements do not include all information and footnotes required by U.S. GAAP for annual consolidated financial statements. In the opinion of management, such interim financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of financial position, results of operations and cash flows for such periods. The results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ended December 31, 2016 or future operating periods. The information included in these interim financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

The Company’s consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company has incurred losses in each year since inception and as of September 30, 2016, had an accumulated deficit of $316.6 million. Also as of September 30, 2016, the Company’s current assets totaled $71.3 million compared with current liabilities of $24.0 million, and the Company had cash and cash equivalents of $69.3 million. In light of the Company’s current operating plan, these factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements for the three and nine months ended September 30, 2016 do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.

 

Until such time, if ever, as the Company can generate substantial product revenues, it expects to seek to raise additional funds through a combination of equity offerings, debt financings, government contracts, government and other third party grants or other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. There can be no assurance that the Company will be able to generate funds in these manners, on terms acceptable to the Company, on a timely basis or at all. The failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations and financial condition and the Company could be forced to delay, reduce, terminate or eliminate its product development programs.

 

The condensed consolidated financial statements include the accounts of the Company and DC Bio Corp., the Company’s Canadian wholly-owned subsidiary, an unlimited liability corporation incorporated in the Province of Nova Scotia. Significant intercompany transactions and accounts have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

  7  
 

 

Significant Accounting Policies

 

There have been no material changes in our significant accounting policies as of and for the three and nine months ended September 30, 2016, as compared with the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less as of the date of purchase to be cash equivalents. Cash deposits are all in financial institutions in the United States, Canada and the European Union. The Company maintains cash in accounts which are in excess of federally insured limits. As of December 31, 2015 and September 30, 2016, $5,913,144 and $69,033,934, respectively, in cash and cash equivalents were uninsured.

 

Restricted Cash

 

The Company had restricted cash of $740,000 as of each of December 31, 2015 and September 30, 2016, which consists of funds maintained in a separate deposit account to secure a letter of credit issued by a bank to the landlord under a lease agreement for the Company’s new corporate headquarters and primary manufacturing facility (see Note 7).

 

Recently Issued Accounting Pronouncements

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15,  Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force).  T his ASU requires changes in the pres entation of certain items in the statement of cash flows including but not limited to debt prepayment or debt extinguishment costs; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees.  This guidance will be effective for annual periods and interim periods within those annual periods beginning after December 15, 2017, will require adoption on a retrospective basis and will be effective for the Company on January 1, 2018. The Company is currently evaluating the impact that adoption of this standard will have on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02,  Leases (Topic 842) ("ASU 2016-02"). The provisions of ASU 2016-02 set out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). This new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted using guidance similar to existing guidance for operating leases. Topic 842 supersedes the previous lease standard, Topic 840  Leases . This guidance will be effective for annual periods and interim periods within those annual periods beginning after December 15, 2018, and will be effective for the Company on January 1, 2019. The Company is currently evaluating the impact that the implementation of this standard will have on the Company's consolidated financial statements.

 

In May 2015, the FASB issued a new standard which removes the requirement to categorize the investments for which fair value is measured using net asset value per share as a practical expedient for fair value within the fair value hierarchy. This standard was effective for the Company for reporting periods beginning after December 15, 2015 and was to be applied retrospectively; early adoption was permitted. The Company adopted this standard on January 1, 2016. There was no impact on the Company’s consolidated financial statements.

 

In April 2015, the FASB issued a new standard update which requires debt issuance costs to be presented in the consolidated balance sheet as a direct deduction from the associated debt liability. This standard became effective for the Company on January 1, 2016 and was applied on a retrospective basis. As a result, deferred financing costs of $93,503 were reclassified to long-term debt as of December 31, 2015.

 

In August 2014, the FASB issued a new standard update that specifies the responsibility that an entity’s management has to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern. The standard is effective for interim and annual periods beginning after December 15, 2016, and is not expected to have an effect on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued a new accounting standard update pertaining to accounting for revenue from contracts with customers. The new guidance clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance. In July 2015, the FASB finalized a one-year delay in the effective date of this standard, which will now be effective for the Company beginning January 1, 2018, however early adoption is permitted any time after the original effective date, which for the Company is January 1, 2017. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s consolidated financial statements.

 

  8  
 

 

2. Fair Value of Financial Instruments

 

The estimated fair values of all of the Company’s financial instruments, excluding long-term debt, approximate their carrying amounts in the consolidated balance sheets as of December 31, 2015 and September 30, 2016.

 

As of December 31, 2015 and September 30, 2016, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. These assets include money market funds included in cash equivalents and as of December 31, 2015 included short-term investments in corporate debt securities. Additionally, as of September 30, 2016, the Company had outstanding warrants recorded as a liability and measured at fair value on a recurring basis (see Note 9). The Company’s short-term investments are classified as available-for-sale investments. As of September 30, 2016, the Company did not own any short-term investments. The valuation of these financial instruments uses a three tiered approach, which requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are: Level 1, defined as quoted prices in active markets for identical assets or liabilities; Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and Level 3, defined as valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

 

The Company’s Level 1 assets consist of money-market funds and restricted cash in a deposit account at a bank. The method used to estimate the fair value of the Level 1 assets is based on observable market data, as these money-market funds are publicly-traded. The Company’s Level 2 assets consist of short-term debt instruments in corporate debt securities valued using independent pricing services which normally derive security prices from recently reported trades for identical or similar securities, making adjustments based on significant observable transactions. As of each balance sheet date, observable market inputs may include trade information, broker or dealer quotes, bids, offers or a combination of these data sources.

 

The Company’s warrant liability is classified as a Level 3 financial liability. The fair value of the warrant liability is measured using the Black-Scholes valuation model. Inherent in the Black-Scholes valuation model are assumptions related to expected stock price volatility, expected life, risk-free interest rate and dividend yield (see Note 9).

 

During the three and nine months ended September 30, 2016, there were no transfers between Levels 1, 2, and 3 assets or liabilities. As of December 31, 2015 and September 30, 2016, these financial instruments and respective fair values have been classified as follows:

 

    Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Balance as of
December 31,
2015
Assets                                
Money-market funds   $ 5,589,684     $     $     $ 5,589,684  
Corporate debt securities – short-term           1,003,160             1,003,160  
Restricted cash     740,000                       740,000  
Total assets at fair value   $ 6,329,684     $ 1,003,160     $     $ 7,332,844  

 

    Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Balance as of
September 30,
2016
Assets                                
Money-market funds   $ 60,357,704     $     $     $ 60,357,704  
Restricted cash     740,000                   740,000  
Total assets at fair value   $ 61,097,704     $     $     $ 61,097,704  
Liabilities                                
Warrants   $     $     $ 21,548,019     $ 21,548,019  
Total liabilities at fair value   $     $     $ 21,548,019     $ 21,548,019  

 

  9  
 

 

The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and estimated fair value of money-market funds included in cash and cash equivalents, corporate debt securities included in short-term investments and restricted cash as of December 31, 2015 and September 30, 2016 were as follows:

 

    As of December 31, 2015
    Amortized Cost
Basis
  Gross
Unrealized
Holding
Gains
  Gross
Unrealized
Holding
Losses
  Aggregate
Fair
Value
Money-market funds   $ 5,589,684     $     $     $ 5,589,684  
Corporate debt securities – short term     1,003,431             (271 )     1,003,160  
Restricted cash     740,000                   740,000  
    $ 7,333,115     $     $ (271 )   $ 7,332,844  

 

    As of September 30, 2016
    Amortized Cost
Basis
  Gross
Unrealized
Holding
Gains
  Gross
Unrealized
Holding
Losses
  Aggregate
Fair
Value
Money-market funds   $ 60,357,704     $     $     $ 60,357,704  
Restricted cash     740,000                   740,000  
    $ 61,097,704     $     $     $ 61,097,704  

 

The fair value of the Company’s debt was derived by evaluating the nature and terms of each note, considering the prevailing economic and market conditions as of each balance sheet date and based on the Level 2 valuation hierarchy of the fair value measurements standard using a present value methodology. The fair value of the Company’s debt as of December 31, 2015 was approximately $32.0 million compared with its carrying value of $32.4 million. The fair value of the Company’s debt as of September 30, 2016 was approximately $31.1 million compared with its carrying value of $31.5 million (see Note 5).

 

3. Property and Equipment

 

Property and equipment consist of the following:

 

    December 31,
2015
  September 30,
2016
Office furniture and equipment   $ 681,954     $ 681,954  
Computer equipment     970,689       1,099,022  
Computer software     629,948       3,171,980  
Laboratory equipment     5,916,539       5,963,600  
Leasehold improvements     2,664,669       2,664,669  
Asset related to facility lease obligation     7,630,660       7,920,033  
Construction-in-progress     12,656,260       25,445,146  
                 
      31,150,719       46,946,404  
Less: Accumulated depreciation and amortization     (8,844,335 )     (9,457,067 )
                 
Property and equipment, net   $ 22,306,384     $ 37,489,337  

 

Assets related to the Company’s facility lease obligation and construction-in-progress were recognized primarily due to the Company being deemed to be the accounting owner of the facility being built to be the Company’s corporate headquarters and primary manufacturing facility during its construction period under build-to-suit lease accounting (see Note 7). Construction-in-progress included $2,372,880 under capital leases (see Note 7). As of December 31, 2015 and September 30, 2016, construction-in-progress included $880,334 and $2,249,785, respectively, of capitalized interest.

 

  10  
 

 

Depreciation and amortization expense was as follows:

 

Three months ended September 30, 2015   $ 171,064  
Three months ended September 30, 2016   $ 257,992  
Nine months ended September 30, 2015   $ 519,026  
Nine months ended September 30, 2016   $ 697,730  

 

4. Income Taxes

 

The Company has incurred net operating losses since inception and is forecasting additional losses through December 31, 2016. Therefore, no U.S. federal, state or foreign income taxes are expected for 2016 and no provision for such taxes has been recorded as of September 30, 2016.

 

Due to the Company’s history of losses since inception, there is not enough evidence at this time to support the conclusion that the Company will generate future income of a sufficient amount and nature to utilize the benefits of the Company’s net deferred tax assets. Accordingly, as of December 31, 2015 and September 30, 2016, the Company provided a full valuation allowance against its net deferred tax assets since as of that time, the Company could not assert that it was more likely than not that these deferred tax assets would be realized.

 

5. Notes Payable

 

Notes payable consist of the following as of December 31, 2015 and September 30, 2016:

 

    December 31,
2015
  September 30,
2016
Notes payable under the venture loan and security agreement, including accrued interest   $ 25,265,451     $ 25,514,270  
Less debt discount and debt issuance costs     (495,229 )     (364,114 )
Notes payable under the venture loan and security agreement, net     24,770,222       25,150,156  
Promissory note payable to Medinet, including accrued interest     7,489,565       6,315,910  
Other notes payable     46,755       35,040  
Total notes payable     32,306,542       31,501,106  
Less current portion     (1,578,284 )     (9,912,628 )
Long-term portion of notes payable   $ 30,728,258     $ 21,588,478  

 

Venture Loan Facility. In September 2014, the Company entered into a venture loan and security agreement (the “Loan Agreement”) with Horizon Technology Finance Corporation and Fortress Credit Co LLC (together, the “Lenders”) under which the Company could borrow up to $25.0 million in two tranches of $12.5 million each (the “Loan Facility”).

 

The Company borrowed the first tranche of $12.5 million upon the closing of the Loan Facility in September 2014 and borrowed the second tranche of $12.5 million in August 2015. The per annum interest rate for each tranche is a floating rate equal to 9.25% plus the amount by which the one-month London Interbank Offered Rate (“LIBOR”) exceeds 0.50% (effectively a floating rate equal to 8.75% plus the one-month LIBOR Rate). The total per annum interest rate shall not exceed 10.75%.

 

The Company incurred $449,796 in debt issuance costs in connection with the closing of the Loan Facility. Debt issuance costs are presented in the consolidated balance sheet as a direct deduction from the associated liability and amortized to interest expense over the terms of the related debt.

 

The Company made payments with respect to the first tranche of $12.5 million on an interest-only basis monthly through October 31, 2016, and is currently making monthly payments of principal and accrued interest through the scheduled maturity date for the first tranche loan on September 30, 2018. In addition, a final payment for the first tranche loan equal to $625,000 will be due on September 30, 2018, or such earlier date specified in the Loan Agreement. The Company is recognizing the final payment of $625,000 as accrued interest over the expected life of the first tranche loan. The Company has agreed to repay the second tranche loan of $12.5 million in 18 monthly payments of interest only until February 7, 2017, followed by 24 monthly payments of principal and accrued interest through the scheduled maturity date for the second tranche loan on February 7, 2019. In addition, a final payment of $625,000 will be due on February 7, 2019, or such earlier date specified in the Loan Agreement. The Company is recognizing the final payment of $625,000 as accrued interest over the expected life of the second tranche loan. In addition, the Company has agreed that if the Company repays all or a portion of the loan prior to the applicable maturity date, it will pay the Lenders a prepayment penalty fee based on a percentage of the then outstanding principal balance, equal to 3% if the prepayment occurs on or before 24 months after the funding date, 2% if the prepayment occurs more than 24 months after, but on or before 36 months after, the funding date thereof, or 1% if the prepayment occurs more than 36 months after the funding date thereof.

 

  11  
 

 

The Company’s obligations under the Loan Agreement are secured by a first priority security interest in substantially all of its assets other than its intellectual property. The Company also has agreed not to pledge or otherwise encumber its intellectual property assets, subject to certain exceptions.

 

The Loan Agreement includes customary affirmative and restrictive covenants, but does not include any covenants to attain or maintain certain financial metrics, and also includes customary events of default, including payment defaults, breaches of covenants, change of control and a material adverse change default. Upon the occurrence of an event of default and following any applicable cure periods, a default interest rate of an additional 5% may be applied to the outstanding loan balances, and the Lenders may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement.

 

In connection with the Loan Agreement, the Company issued to the Lenders and their affiliates warrants to purchase a total of 82,780 shares of the Company’s common stock at a per share exercise price of $9.06 (the “Venture Loan Warrants”). Upon the Company’s satisfaction of the conditions precedent to the making of the second tranche loan, the Venture Loan Warrants became exercisable in full. The Venture Loan Warrants will terminate on September 29, 2021 or such earlier date as specified in the Venture Loan Warrants. As of September 29, 2014, the Company recorded a debt discount of $338,673 equal to the value of these Venture Loan Warrants. This debt discount is offset against the long-term portion of the note payable balance and included in additional paid-in capital on the Company's consolidated balance sheet.

 

Medinet Loan. In December 2013, in connection with a license agreement currently with Medinet Co., Ltd and its wholly-owned subsidiary, MEDcell Co., Ltd. (together "Medinet"), as described in Note 11, the Company borrowed $9.0 million pursuant to an unsecured promissory note that bears interest at a rate of 3.0% per annum. The principal and interest under the note are due and payable on December 31, 2018. Under the terms of the note and the license agreement, any milestone payments related to the developmental and regulatory milestones that become due will be applied first to the repayment of the loan. The Company has the right to prepay the loan at any time. If the Company has not repaid the loan by December 31, 2018, then the Company has agreed to grant to Medinet a non-exclusive, royalty-bearing license to make and sell Arcelis products in Japan for the treatment of cancer. In such event, the amounts owing under the loan as of December 31, 2018 may constitute pre-paid royalties under the license or would be due and payable. Royalties under this license would be paid until the expiration of the licensed patent rights in Japan at a rate to be negotiated. If the Company and Medinet cannot agree on the royalty rate, they have agreed to submit the matter to arbitration. Because the $9.0 million promissory note was issued at a below market interest rate, the Company allocated the proceeds of the loan between the license agreement and the debt at the time of issuance. Accordingly, as of the borrowing date, December 31, 2013, the Company recorded $6.9 million to notes payable, based upon an effective interest rate of 8.0%, and $2.1 million as a deferred liability.

 

During the year ended December 31, 2015, the Company recognized a $1.0 million milestone payment as deferred revenue under the Medinet license agreement and reduced the related note payable by $0.8 million and the deferred liability by $0.2 million. As of December 31, 2015, the amount of the note payable was $7.5 million, including $1.3 million of accrued interest. During the nine months ended September 30, 2016, the Company recognized a $2.0 million milestone payment as deferred revenue under this license agreement and reduced the related note payable by $1.5 million and the deferred liability by $0.5 million. As of September 30, 2016, the amount of the note payable was $6.3 million, including $1.7 million of accrued interest. As of December 31, 2015 and September 30, 2016, the total deferred liability associated with the Medinet note was $3.8 million and $5.3 million, respectively (see Note 11).

 

Other Notes. During November 2013, the Company borrowed $77,832 from a lending institution to finance the purchase of computer equipment, of which $46,754 and $35,040 in principal was outstanding as of December 31, 2015 and September 30, 2016, respectively. Borrowings are collateralized by substantially all of the computer equipment financed under the agreement, bear interest at a rate of 8.31% per annum and are to be repaid in 60 equal monthly installments commencing on the date of borrowing.

 

6. Manufacturing Research and Development Obligation

 

In October 2014, the Company entered into a development agreement (the “Invetech Development Agreement”) with Invetech Pty Ltd (“Invetech”). The Invetech Development Agreement supersedes and replaces the development agreement entered into by the parties in July 2005. Under the Invetech Development Agreement, Invetech will continue to develop and provide prototypes of the automated production system to be used for the manufacture of the Company’s Arcelis-based products (the “Production Systems”). Development services will be performed on a proposal by proposal basis.

 

Invetech has agreed to defer 30% of its fees, but such deferral will not exceed $5.0 million. Deferred fees (plus interest of 7% per annum) would become payable either, at the Company’s option, in a lump sum within 90 days of the “Sunset Date Trigger Event” or pursuant to an installment plan (either in four installments payable within the first year or eight installments payable within the first two years after the “Sunset Date Trigger Event”). The “Sunset Date Trigger Event” is December 31, 2016. Invetech is entitled to a 10% bonus payment if the ADAPT trial is closed early indicating positive efficacy or if the ADAPT trial meets the primary endpoint of overall survival and the 100% of events analysis indicates positive efficacy, and if Invetech has timely completed all activities up to the time the ADAPT trial is stopped.

 

  12  
 

 

As of December 31, 2015, the Company recorded this manufacturing research and development obligation on its consolidated balance sheet at $7.8 million, representing $5.2 million in deferred fees, $2.3 million in estimated bonus payments and $0.3 million in accrued interest. As of September 30, 2016, the Company recorded this manufacturing research and development obligation on its consolidated balance sheet at $8.1 million, representing $5.2 million in deferred fees, $2.3 million in estimated bonus payments and $0.5 million in accrued interest, of which $2.9 million is included in current liabilities as the current portion of the obligation.

 

The Invetech Development Agreement requires the parties to discuss in good faith Invetech’s supply of Production Systems for use in manufacturing commercial product. The Company has an obligation to purchase $25.0 million worth of Production Systems, components, subsystems and spare parts for commercial use. Once that obligation has been satisfied, the Company has the right to have a third party supply Production Systems for use in manufacturing commercial product provided that Invetech has a right of first refusal with respect to any offer by a third party and the Company may not accept an offer from a third party unless that offer is at a price that is less than that offered by Invetech and otherwise under substantially the same or better terms. The Company will own all intellectual property arising from the development services (with the exception of existing Invetech intellectual property incorporated therein under which the Company will have a license). The Invetech Development Agreement will continue until the completion of the development of the Production Systems. The Invetech Development Agreement can be terminated early by either party because of a technical failure or by the Company without cause.

 

7. Facility Lease Obligation and Capital Lease Obligations

 

Facility Lease Obligation

In August 2014, the Company entered into a Lease Agreement (the “Lease Agreement”) with TKC LXXII, LLC, a North Carolina limited liability company (“TKC”). Under the Lease Agreement, the Company agreed to lease certain land and an approximately 125,000 square-foot building to be constructed in Durham County, North Carolina, which the Company refers to as Centerpoint. The Company intended this facility to be built to house the Company’s corporate headquarters and primary manufacturing facility. The lease for the current facility expires in November 2017. The shell of the new facility was constructed on a build-to-suit basis by TKC in accordance with agreed upon specifications and plans as set forth in the Lease Agreement and at the expense of TKC, other than those costs resulting from changes requested by the Company, for which the Company has paid $1.7 million as of September 30, 2016.

 

The term of the Lease Agreement is 10 years from the commencement date of July 1, 2015. The Company has an option to extend the Lease Agreement by six five-year renewal terms. Current rent payments in the second year are $47,972 per month, subject to certain fixed increases over the course of the term as set forth in the Lease Agreement.

 

The Lease Agreement required the Company to provide TKC with a letter of credit. The Company provided the bank that issued the letter of credit on its behalf a security deposit of $1,325,000 to guarantee the letter of credit. In accordance with the Lease Agreement, this deposit was reduced to $740,000 as of December 31, 2015 under a purchase and sale agreement with TKC. The deposit is recorded as restricted cash as of December 31, 2015 and September 30, 2016 on the Company’s consolidated balance sheets.

 

Under the Lease Agreement, the Company is involved in the construction of the building. To the extent the Company is involved with the structural improvements of the construction project or takes construction risk prior to the commencement of a lease, ASC 840-40-05-5 requires for accounting purposes that the Company be considered the owner of this project during the construction period. Therefore, the Company recorded an asset in property and equipment, net on the Company’s consolidated balance sheets for the cost of the Company’s portion of the building plus the amount of estimated structural construction costs incurred by TKC and the Company as of the applicable balance sheet date. The Company recorded a corresponding facility lease obligation on its consolidated balance sheets representing the amounts paid by TKC.

 

The initial recording of these assets and liabilities is classified as non-cash investing and financing items, respectively, for purposes of the Company’s consolidated statements of cash flows. The Company recorded an asset related to the facility lease obligation included in property and equipment of $7.6 million and $7.9 million as of December 31, 2015 and September 30, 2016, respectively. The facility lease obligation on the Company’s consolidated balance sheet is $7.2 million and $7.4 million as of December 31, 2015 and September 30, 2016, respectively.

 

Under the Lease Agreement, the Company had an option to purchase the property. In February 2015, the Company exercised this purchase option and entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with TKC. The purchase price to be paid by the Company at closing was $7.4 million plus the amount of any additional costs incurred by TKC as a result of changes requested by the Company, for which the Company had paid $1.7 million as of September 30, 2016, and the amount of any improvement allowances advanced to the Company by TKC prior to the closing. Under the terms of the Purchase Agreement, the Company had until October 31, 2016 to consummate the purchase of the property. The Company did not purchase the property by such date. As a result, the Company has no further right to purchase the property and remains subject to the lease under the Lease Agreement.

 

  13  
 

Capital Lease Obligations

 

In August 2016, the Company entered into two agreements (the “Power Generation Agreements”) with an electric utility company. The Power Generation Agreements are being accounted for as capital leases for financial reporting purposes. Under the lease agreements, the electric utility company agreed to design, procure, install, own and maintain electrical equipment at Centerpoint to provide required electrical loads. The Power Generation Agreements require monthly minimum payments of $32,948 for a period of 128 months, or a total of $4.2 million ending in March 2027. Property, plant and equipment as of September 30, 2016 included $2.4 million under the Power Generation Agreements.

 

Future minimum payments due under the Power Generation Agreements are as follows as of September 30, 2016:

 

Year ending December 31:        
2016   $ 98,844  
2017     395,376  
2018     395,376  
2019     395,376  
2020     395,376  
Thereafter     2,471,100  
Total future minimum payments     4,151,448  
Amounts representing interest     (1,801,731 )
Present value of net minimum payments     2,349,717  
Current portion of capital lease obligations     (119,273 )
Long-term portion of capital lease obligations   $ 2,230,444  

 

8. Stockholders’ (Deficit) Equity

 

Issuance of Common Stock in the Nine Months Ended September 30, 2016

 

PIPE Financing

 

On March 4, 2016, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain investors (the “Investors”), pursuant to which the Company agreed to issue and sell an aggregate of up to $60 million of the Company’s common stock (the “Shares”) and warrants to purchase shares of common stock (the “Warrants”) in a private placement (the “PIPE Financing”). Investors participating in the PIPE Financing included Pharmstandard, ForArgos B.V., Tianyi Lummy International Holdings Group Ltd. (“Tianyi Lummy”), China BioPharma Capital I, L.P. (“China BioPharma”), TVM V Life Science Ventures GmbH & Co. KG and Wasatch Funds Trust. Andrei Petrov, Igor Krol, Hubert Birner and Sander van Deventer (collectively, the “Investor Directors”), who are members of the Company’s board of directors, are affiliated with certain of the Investors.

 

The PIPE Financing was to take place in up to three tranches. Under the Securities Purchase Agreement, at the initial closing, which occurred on March 14, 2016, the Company sold and the Investors purchased for a total purchase price of $19,882,915 a total of 3,652,430 Shares and Warrants to purchase a total of 2,739,323 shares of common stock (0.75 shares of common stock for each Share purchased), based on a purchase price per Share and accompanying Warrant equal to $5.44375 (the “Purchase Price”). At the second closing, which occurred on June 29, 2016, the Company sold and the Investors purchased for a total purchase price of $29,824,520 a total of 5,478,672 Shares and Warrants to purchase a total of 4,109,005 shares of common stock (0.75 shares of common stock for each Share purchased), based on a purchase price per Share and accompanying Warrant equal to the Purchase Price. The closing of the second tranche was triggered by the recommendation from the Company’s independent data monitoring committee (the “IDMC”) that the Company continue the ADAPT trial based on the results of the IDMC’s scheduled interim data review. The Warrants have an exercise price of $5.35 per share, expire on the fifth anniversary of the date of issuance and have other terms described below under “Warrants.”

 

  14  
 

 

Under the Securities Purchase Agreement, Pharmstandard International S.A. (“Pharmstandard”) agreed that, at the Company’s option following the satisfaction of certain conditions, it could be required to purchase at a third closing up to $10,292,563 of Shares (without Warrants). The dollar amount of Shares to be purchased by Pharmstandard at the third closing was subject to reduction on a dollar-for-dollar basis for certain cash amounts raised by the Company after the initial closing through equity or debt financings or collaborations. The net proceeds received from the sale of common stock and accompanying warrants in the Company’s follow-on public offering that closed on August 2, 2016 (see below) reduced in full the dollar amount committed to be purchased in the third tranche and as a result the Company has no further ability to effect the closing of, and Pharmstandard has no further obligation to purchase Shares in, the third tranche of the PIPE Financing.

 

The Company agreed to pay at each closing the legal expenses of the Investors and the legal expenses of the Investors incurred in connection with the resale registration obligations of the Company set forth in the Registration Rights Agreement (as defined below); provided, however, that the Company had no obligation to pay more than a total of $140,000 with respect to such expenses.

 

The Company has granted the Investors, and the Investors have granted the Company, indemnification rights with respect to its or their representations, warranties, covenants and agreements under the Securities Purchase Agreement.

 

Warrants

 

The Warrants issued at the first closing and second closing are exercisable for shares of the Company’s common stock at an exercise price of $5.35 per share on or prior to the fifth anniversary of the date of issuance, are immediately exercisable, and are exercisable for cash or by cashless exercise in certain limited circumstances.

 

Registration Rights Agreement

 

On March 4, 2016, in connection with entering into the Securities Purchase Agreement, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the Investors, pursuant to which the Company agreed to register for resale the Shares and the shares of the Company’s common stock issued upon exercise of the Warrants (the “Warrant Shares,” and together with the Shares, the “Registrable Securities”). Under the Registration Rights Agreement, the Company agreed to use its best efforts to file a registration statement after each closing covering the Shares and the Warrant Shares underlying the Warrants sold at such closing, as applicable, and to use its best efforts to keep such registration statement effective until the date the Shares and Warrant Shares covered by such registration statement have been sold or may be sold pursuant to Rule 144 without restriction.

 

A registration statement covering the Shares and Warrant Shares purchased at the initial closing was filed on May 13, 2016 and declared effective on May 26, 2016. A registration statement covering the Shares and Warrant Shares purchased at the second closing was filed on July 22, 2016 and declared effective on August 16, 2016. In the event that either registration statement is not available to cover any sales of Registrable Securities registered by such registration statement, then the Company has agreed to make pro rata payments to each Investor holding such Registrable Securities as liquidated damages in an amount equal to 1% of the aggregate amount invested by each such Investor for such Registrable Securities per 30-day period or pro rata for any portion thereof following the date by which such Registration Statement should have been effective, subject to specified exceptions.

 

  15  
 

 

The Company has granted the Investors, and the Investors have granted to the Company, customary indemnification rights in connection with the registration statements.

 

At-the-market Offering

 

In May 2015, the Company entered into a sales agreement, or the Sales Agreement, with Cowen & Company, LLC, or Cowen, pursuant to which the Company may issue and sell shares of the Company’s common stock from time to time having an aggregate offering price of up to $30 million through Cowen, acting as the Company’s agent. Sales of the Company’s common stock through Cowen may be made by any method permitted that is deemed an “at the market offering” as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on or through the Nasdaq Global Market, sales made to or through a market maker other than on an exchange or otherwise, in negotiated transactions at market prices, and/or any other method permitted by law. Cowen is not required to sell any specific amount, but acts as the Company’s sales agent using commercially reasonable efforts consistent with its normal trading and sales practices. Shares sold pursuant to the Sales Agreement have been sold pursuant to a shelf registration statement, which became effective on May 14, 2015. Under the Sales Agreement, the Company has agreed to pay Cowen a commission of up to 3% of the gross proceeds of any sales made pursuant to the Sales Agreement. As of November 7, 2016, the Company has sold 872,682 shares of common stock pursuant to the Sales Agreement, resulting in proceeds of $5.5 million, net of commissions and issuance costs.

 

Follow-On Public Offering

 

On August 2, 2016, the Company issued and sold 9,090,909 shares of common stock and warrants to purchase an aggregate of 6,818,181 shares of common stock in an underwritten public offering at a price to the public of $5.50 per share and accompanying warrant. The shares of common stock and warrants were sold in combination, with one warrant to purchase up to 0.75 of a share of common stock accompanying each share of common stock sold. The warrants have an exercise price of $5.50 per share, became immediately exercisable upon issuance and will expire on August 2, 2021. The aggregate net proceeds to the Company of the offering were approximately $48.2 million after deducting underwriting discounts and commissions and offering expenses.

 

Other Common Stock Issued in the Nine Months Ended September 30, 2016

 

In lieu of paying certain annual cash bonuses for 2015, in January 2016 the Company granted restricted stock awards to certain of its executive officers and employees. The number of shares granted to each executive officer and employee was calculated by dividing the amount of the 2015 annual cash bonus that would otherwise have been paid to such executive officer or employee by the closing price of the Company’s common stock on January 8, 2016 of $2.24 per share. A total of 296,936 shares of restricted common stock with a value of $665,137 were issued. Each of the restricted stock awards is subject to a lapsing right of repurchase in the Company’s favor, which right will lapse with respect to 100% of the underlying shares of each award on November 20, 2016, assuming such executive or employee is still providing services to the Company on such date.

 

For 2016, the Company’s board of directors determined that each non-employee director will receive shares of the Company’s common stock under the Company’s 2014 stock incentive plan in lieu of cash board fees on the last day of each calendar quarter in 2016. The number of shares to be granted to each non-employee director on a quarterly basis shall be that number of whole shares of the Company’s common stock equal to the dollar amount of such director’s fees for a given calendar quarter divided by the closing share price of the Company’s common stock on the last trading day of such calendar quarter. During the three and nine months ended September 30, 2016, the Company issued 14,207 and 37,770 shares, respectively, of its common stock as board compensation to non-employee directors in lieu of $70,609 and $218,424, respectively, in cash board fees and such amounts are included in general and administrative expenses.

 

During the three and nine months ended September 30, 2016, the Company recorded share-based expense in connection with the grant of restricted stock to certain employees and a consultant of $64,137 and $107,366, respectively. Of these amounts, during the three and nine months ended September 30, 2016, $47,149 and $85,239, respectively, is included in general and administrative expenses, and $16,988 and $22,127, respectively, is included in research and development expenses.

 

9. Stock Options and Warrants

 

2014 Stock Incentive Plan and 2014 Employee Stock Purchase Plan

 

In January 2014, the Company’s board of directors and stockholders approved, effective upon the closing of the Company’s initial public offering, the 2014 Stock Incentive Plan (the “2014 Plan”). Under the 2014 Plan, the Company may grant incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards for the purchase of that number of shares of common stock equal to the sum of 1,951,182 shares, plus such number of shares, up to 357,841 shares, as is equal to the sum of the number of shares reserved for issuance under the Company’s 2008 Stock Incentive Plan (the “2008 Plan”) that remained available for grant under the 2008 Plan immediately prior to the closing of the Company’s initial public offering on February 12, 2014 (381,250 shares) and the number of shares subject to outstanding awards under the 2008 Plan that expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right, plus an annual increase, to be added on the first day of each fiscal year from January 1, 2015 through January 1, 2024, equal to the lowest of 2,309,023 shares of common stock, 4% of the number of the Company’s outstanding shares on the first day of each such fiscal year and an amount determined by the Company’s board of directors.

 

  16  
 

 

Also in January 2014, the Company’s board of directors and stockholders approved, effective upon the closing of the Company’s initial public offering, a 2014 Employee Stock Purchase Plan (the “2014 ESPP”). Under the 2014 ESPP, on the offering commencement date of each plan period (the “Purchase Plan Period”), the Company will grant to each eligible employee who is then a participant in the 2014 ESPP an option to purchase shares of common stock. The employee may authorize up to a maximum of 10% of his or her base pay to be deducted by the Company during each Purchase Plan Period. Each employee who continues to be a participant in the 2014 ESPP on the last business day of the Purchase Plan Period is deemed to have exercised the option, to the extent of accumulated payroll deductions within the 2014 ESPP ownership limits.

 

Under the terms of the 2014 ESPP, the option exercise price shall be determined by the Company’s board of directors for each Purchase Plan Period and the option exercise price will be at least 85% of the applicable closing price of the common stock. The option exercise price will be 85% of the lower of the Company’s closing stock price on the first and last business day of each Purchase Plan Period. The Company’s first Purchase Plan Period commenced on September 2, 2014 and ended on February 27, 2015. For the first Purchase Plan Period, 13,054 shares were purchased with employee withholdings at an option exercise price based upon 85% of the lower of the closing price at the beginning of the first Purchase Plan Period of $9.83 and the closing price on February 27, 2015 of $9.02, resulting in the recognition of stock-based compensation expense of $54,508. The Company’s second Purchase Plan Period commenced on March 2, 2015 and ended on August 31, 2015. For the second Purchase Plan Period, 20,301 shares were purchased with employee withholdings at an option exercise price based upon 85% of the lower of the closing price at the beginning of the second Purchase Plan Period of $9.02 and the closing price on August 31, 2015 of $6.21, resulting in the recognition of stock-based compensation expense of $72,800. The Company’s third Purchase Plan Period commenced on September 1, 2015 and ended on February 29, 2016. For the third Purchase Plan Period, 36,290 shares were purchased with employee withholdings at an option exercise price based upon 85% of the lower of the closing price at the beginning of the third Purchase Plan Period of $6.24 and the closing price of $4.44 on February 29, 2016, resulting in the recognition of stock-based compensation expense of $107,455. The Company’s fourth Purchase Plan Period commenced on March 1, 2016 and ended on August 31, 2016. For the fourth Purchase Plan Period, 30,157 shares were purchased with employee withholdings at an option exercise price based upon 85% of the lower of the closing price at the beginning of the fourth Purchase Plan Period of $4.91 and the closing price of $4.95 on August 31, 2016, resulting in the recognition of stock-based compensation expense of $63,788. The Company’s fifth Purchase Plan Period commenced on September 1, 2016 and will end on February 28, 2017.

 

Upon the exercise of stock options, vesting of other awards and purchase of shares through the 2014 ESPP or under the 2014 Plan, the Company issues new shares of common stock. All awards granted under the 2014 Plan that are canceled prior to vesting or expire unexercised are returned to the approved pool of reserved shares under the 2014 Plan and made available for future grants. As of September 30, 2016, there were 691,740 shares of common stock remaining available for future issuance under the 2014 Plan and 246,551 shares of common stock remaining available for future issuance under the 2014 ESPP.

 

The Company recorded the following stock-based compensation expense:

 

    Three Months Ended
September 30,
  Nine Months Ended
September 30,
    2015   2016   2015   2016
Research and development   $ 495,496     $ 558,209     $ 1,500,069     $ 2,006,014  
General and administrative     552,781       723,719       1,360,798       1,974,357  
                                 
Total stock-based compensation expense   $ 1,048,277     $ 1,281,928     $ 2,860,867     $ 3,980,371  

 

Allocations to research and development and general and administrative expenses are based upon the department to which the associated employee reported. No related tax benefits of the stock-based compensation expense have been recognized. Stock-based payments issued to nonemployees are recorded at their fair values, and are periodically revalued as the equity instruments vest and are recognized as expense over the related service period. During the nine months ended September 30, 2016, modifications were made to certain stock option grants that accelerated the vesting of such grants to 18 terminated employees resulting in an increase to stock-based compensation expense of $0.6 million.

 

During the three months ended September 30, 2015, the Company granted options to employees to purchase a total of 80,400 shares of the Company’s common stock at exercise prices ranging from $6.21 to $6.68 per share, which in each instance was the closing price of the Company’s common stock on the grant date. During the three months ended September 30, 2016, the Company granted options to employees to purchase a total of 395,373 shares of the Company’s common stock at exercise prices ranging from $4.86 to $6.30 per share, which in each instance was the closing price of the Company’s common stock on the grant date.

 

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During the nine months ended September 30, 2015, the Company granted options to employees and non-employee directors to purchase a total of 702,700 shares of the Company’s common stock at exercise prices ranging from $6.21 to $9.01 per share, which in each instance was the closing price of the Company’s common stock on the grant date. During the nine months ended September 30, 2016, the Company granted options to employees to purchase a total of 1,605,479 shares of the Company’s common stock at exercise prices ranging from $2.16 to $10.97 per share, which in each instance was the closing price of the Company’s common stock on the grant date, except for 565,000 options granted to the Company’s executive committee employees which have an exercise price of $7.41 compared with the $5.95 closing price of the Company’s common stock on the grant date.

 

The following table summarizes the Company’s stock option activity during the nine months ended September 30, 2016:

 

    Number of
Shares
  Weighted
Average Exercise
Price
  Weighted
Average
Contractual
Term
(in years)
Outstanding as of December 31, 2015     3,318,541     $ 6.24          
Granted     1,605,479     $ 5.86          
Exercised     (21,182 )   $ 6.35          
Cancelled     (110,050 )   $ 7.28          
                         
Outstanding as of September 30, 2016     4,792,788     $ 6.09       7.61  
                         
Exercisable as of September 30, 2016     2,086,297     $ 5.96       5.88  
                         
Vested and expected to vest as of September 30, 2016     4,636,135     $ 6.09       7.47  

 

Valuation Assumptions for Stock Option Plans and Employee Stock Purchase Plan

 

The employee stock-based compensation expense recognized was determined using the Black-Scholes option valuation model. Option valuation models require the input of subjective assumptions and these assumptions can vary over time. The weighted average assumptions used were as follows for the periods indicated:

  

    Stock Option Plan   Employee Stock Purchase Plan
                 
    Nine Months Ended
September 30,
  Nine Months Ended
September 30,
    2015   2016   2015   2016
Risk-free interest rate     2.06 %     1.47 %     0.07 %     0.47 %
Dividend yield     0 %     0 %     0 %     0 %
Expected option term (in years)     7       7       0.5       0.5  
Volatility     87 %     82 %     58 %     118 %

 

Warrants

 

As discussed in Note 8 regarding the PIPE Financing, on March 14, 2016, the Company sold and the Investors purchased for a total purchase price of $19,882,915 a total of 3,652,430 Shares and Warrants to purchase a total of 2,739,323 shares of common stock at a per share exercise price of $5.35. These Warrants will terminate on March 14, 2021 or such earlier date as specified in the Warrants. Additionally, on June 29, 2016, the Company sold and the Investors purchased for a total purchase price of $29,824,520 a total of 5,478,672 Shares and Warrants to purchase a total of 4,109,005 shares of common stock at a per share exercise price of $5.35. These Warrants will terminate on June 29, 2021 or such earlier date as specified in the warrants. During the nine months ended September 30, 2016, Warrants were exercised to purchase 56,062 shares of common stock for proceeds of $299,932 to the Company.

 

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As discussed in Note 8, regarding the Follow-On Public Offering, on August 2, 2016, the Company sold and the investors purchased for a total purchase price of $50.0 million a total of 9,090,909 shares and warrants to purchase a total of 6,818,181 shares of common stock at a per share exercise price of $5.50. These warrants will terminate on August 2, 2021 or such earlier date as specified in the warrants.

 

As discussed in Note 5 regarding the Company’s notes payable, in connection with the Loan Agreement, the Company issued to the Lenders and their affiliates warrants to purchase a total of 82,780 shares of common stock at a per share exercise price of $9.06. Upon the Company’s satisfaction of the conditions precedent to the making of the second tranche loan, the warrants became exercisable in full. The warrants will terminate on September 29, 2021 or such earlier date as specified in the warrants.   

 

As of September 30, 2016, outstanding warrants to purchase a total of 13,693,227 shares of the Company’s common stock were as follows:

 

Type of Warrant   Number of Shares   Exercise Price   Expiration
Date(s)
Common stock     82,780     $ 9.06     9/29/21
Common stock     2,683,261     $ 5.35     3/14/21
Common stock     4,109,005     $ 5.35     6/29/21
Common stock     6,818,181     $ 5.50     8/02/21

 

The following warrants were issued on August 2, 2016 (the “August 2016 Warrants”) and remained outstanding as of September 30, 2016, and include provisions that could require cash settlement of the August 2016 warrants. The August 2016 Warrants are therefore recorded as liabilities of the Company at the estimated fair value as of the date of issuance. The August 2016 Warrants are required to be recorded at fair value as of the end of each subsequent reporting period, with changes in fair value recorded as other income or expense in the Company’s statement of operations in each subsequent period:

 

    August 2016
Warrants
Exercise price   $ 5.50  
Expiration date     August 2, 2021  
Total shares issuable on exercise     6,818,181  

 

The fair value of the August 2016 Warrants is measured using the Black-Scholes valuation model. Inherent in the Black-Scholes valuation model are assumptions related to expected stock price volatility, expected life, risk-free interest rate and dividend yield. The risk-free interest rate is based on the U.S. Treasury five-year maturity yield curve in effect on the date of valuation. The dividend yield percentage is zero because the Company neither currently pays dividends nor intends to do so during the expected term of the August 2016 Warrants. Expected stock price volatility is based on an average of several peer public companies. The expected life of the August 2016 Warrants is assumed to be equivalent to their remaining contractual term. The assumptions used by the Company to determine the fair value of the August 2016 warrants are summarized in the following table as of the date of issuance and as of September 30, 2016:

 

    August 2, 2016   September 30, 2016
         
Exercise price of warrants   $ 5.50     $ 5.50  
Closing underlying stock price on date of valuation   $ 4.99     $ 4.97  
Expected stock price volatility     84 %     84 %
Expected life (in years)     5.00       4.83  
Risk-free interest rate     1.07 %     1.14 %
Expected dividend yield     0.0 %     0.0 %
Valuation per common share underlying each warrant   $ 3.22     $ 3.16  
Total liability for warrants on the balance sheet   $ 21,933,412     $ 21,548,019  
Decrease in fair value during the three months ended September 30, 2016           $ 385,393  

 

In November 2013, the Company entered into an agreement with Pharmstandard under which Pharmstandard purchased additional shares of the Company’s Series E preferred stock. Upon the closing of the Company’s initial public offering, all of the outstanding shares of redeemable convertible preferred stock automatically converted into 13,188,251 shares of the Company’s common stock.  Under this agreement, the Company agreed to enter into a manufacturing rights agreement for the European market with Pharmstandard, which also provided for the issuance of warrants to Pharmstandard to purchase 499,788 shares of the Company’s common stock at an exercise price of $5.82 per share. As of September 30, 2016, the Company had not entered into this manufacturing rights agreement or issued such warrants.

 

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10. Revenue and Concentration of Credit Risk

 

In September 2006, the Company entered into a multi-year research contract with the National Institutes of Health (“NIH”) and the National Institute of Allergy and Infectious Diseases (“NIAID”) to design, develop and clinically test an autologous HIV immunotherapy capable of eliciting therapeutic immune responses. The Company is using funds from this contract to develop AGS-004. Under this contract, as amended, the NIH and NIAID have committed to fund up to a total of $39.8 million, including reimbursement of direct expenses and allocated overhead and general and administrative expenses of up to $38.4 million and payment of other specified amounts totaling up to $1.4 million upon the Company’s achievement of specified development milestones. Since September 2010, the Company has received reimbursement of its allocated overhead and general and administrative expenses at provisional indirect cost rates equal to negotiated provisional indirect cost rates agreed to with the NIH and NIAID in September 2010. These provisional indirect cost rates are subject to adjustment based on the Company’s actual costs pursuant to the agreement with the NIH and NIAID. This commitment originally extended until May 2013. The Company agreed to an additional modification of the Company’s contract with the NIH and NIAID under which the NIH and NIAID agreed to increase their funding commitment to the Company by an additional $5.4 million in connection with the extension of the contract from May 2013 to September 2015. Additionally, a contract modification for a $0.5 million increase was agreed to by the NIH on September 18, 2014 to cover a portion of the manufacturing costs of the planned Phase 2 clinical trial of AGS-004 for long-term viral control in pediatric patients. This modification extended the NIH and NIAID’s commitment under the contract to July 2016. On June 29, 2016, a contract modification was agreed to that extended the NIH and NIAID’s commitment under the contract to July 31, 2018. The Company has agreed to a statement of work under the contract, and is obligated to furnish all the services, qualified personnel, material, equipment, and facilities not otherwise provided by the U.S. government, needed to perform the statement of work.

 

The Company recognizes revenue from reimbursements earned in connection with the contract as reimbursable costs are incurred and recognizes revenues from the achievement of milestones under the NIH and NIAID contract upon the accomplishment of any such milestone.

 

For the three months ended September 30, 2015 and 2016, the Company recorded revenue under this agreement of $130,849 and $119,256, respectively. For the nine months ended September 30, 2015 and 2016, the Company recorded revenue under this agreement of $374,455 and $671,828, respectively. The Company has recorded total revenue of $37.8 million through September 30, 2016 under the NIH and NIAID agreement. As of September 30, 2016, there was up to $2.0 million of potential revenue remaining to be earned under the agreement with the NIH and NIAID. As of December 31, 2015 and September 30, 2016, the Company recorded a receivable from the NIH and NIAID of $73,818 and $119,256, respectively. The concentration of credit risk is equal to the outstanding accounts receivable and such risk is subject to the credit worthiness of the NIH and NIAID. There have been no credit losses under this arrangement.

 

11. Collaboration Agreements

 

Pharmstandard License Agreement

 

In August 2013, Pharmstandard purchased shares of the Company’s series E preferred stock. Concurrently with such purchase, the Company entered into an exclusive royalty-bearing license agreement with Pharmstandard. Under this license agreement, the Company granted Pharmstandard and its affiliates a license, with the right to sublicense, develop, manufacture and commercialize AGS-003 and other products for the treatment of human diseases, which are developed by Pharmstandard using the Company’s individualized immunotherapy platform, in the Russian Federation, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine and Uzbekistan, which the Company refers to as the Pharmstandard Territory. The Company also provided Pharmstandard with a right of first negotiation for development and commercialization rights in the Pharmstandard Territory to specified additional products the Company may develop.

 

Under the terms of the license agreement, Pharmstandard licensed the Company rights to clinical data generated by Pharmstandard under the agreement and granted the Company an option to obtain an exclusive license outside of the Pharmstandard Territory to develop and commercialize improvements to the Company’s Arcelis technology generated by Pharmstandard under the agreement, a non-exclusive worldwide royalty-free license to Pharmstandard improvements to manufacture products using the Company’s Arcelis technology and a license to specified follow-on licensed products generated by Pharmstandard outside of the Pharmstandard Territory, each on terms to be negotiated upon the Company’s request for a license. In addition, Pharmstandard agreed to pay the Company pass-through royalties on net sales of all licensed products in the low single digits until it has generated a specified amount of aggregate net sales. Once the net sales threshold is achieved, Pharmstandard will pay the Company royalties on net sales of specified licensed products, including AGS-003, in the low double digits below 20%. These royalty obligations last until the later of the expiration of specified licensed patent rights in a country or the twelfth anniversary of the first commercial sale in such country on a country by country basis and no further royalties on specified other licensed products. After the net sales threshold is achieved, Pharmstandard has the right to offset a portion of the royalties Pharmstandard pays to third parties for licenses to necessary third party intellectual property against the royalties that Pharmstandard pays to the Company.

 

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The agreement will terminate upon expiration of the royalty term, upon which all licenses will become fully paid-up perpetual exclusive licenses. Either party may terminate the agreement for the other party’s uncured material breach or if specified conditions occur relating to the other party’s insolvency or bankruptcy and the Company may terminate the agreement if Pharmstandard challenges or assists a third party in challenging specified patent rights of ours. If Pharmstandard terminates the agreement upon the Company’s material breach or bankruptcy, Pharmstandard is entitled to terminate the Company’s licenses to improvements generated by Pharmstandard, upon which the Company may come to rely for the development and commercialization of AGS-003 and other licensed products outside of the Pharmstandard Territory, and to retain its licenses from the Company and to pay the Company substantially reduced royalty payments following such termination.

 

In November 2013, the Company entered into an agreement with Pharmstandard under which Pharmstandard purchased additional shares of the Company’s series E preferred stock. Under this agreement, the Company agreed to enter into a manufacturing rights agreement for the European market with Pharmstandard, which also provided for the issuance of warrants to Pharmstandard to purchase 499,788 shares of the Company’s common stock at an exercise price of $5.82 per share. The Company has not entered into this manufacturing rights agreement or issued the warrants. All outstanding shares of the Company’s preferred stock converted into shares of the Company’s common stock upon the closing of its initial public offering in February 2014.

 

Green Cross License Agreement

 

In July 2013, the Company entered into an exclusive royalty-bearing license agreement with Green Cross Corp. ("Green Cross"). Under this agreement, the Company granted Green Cross a license to develop, manufacture and commercialize AGS-003 for mRCC in South Korea. The Company also provided Green Cross with a right of first negotiation for development and commercialization rights in South Korea to specified additional products the Company may develop.

 

Under the terms of the license, Green Cross has agreed to pay the Company $500,000 upon the initial submission of an application for regulatory approval of a licensed product in South Korea, $500,000 upon the initial regulatory approval of a licensed product in South Korea and royalties ranging from the mid-single digits to low double digits below 20% on net sales until the fifteenth anniversary of the first commercial sale in South Korea. In addition, Green Cross has granted the Company an exclusive royalty free license to develop and commercialize all Green Cross improvements to the Company’s licensed intellectual property in the rest of the world, excluding South Korea, except that, as to such improvements for which Green Cross makes a significant financial investment and that generate significant commercial benefit in the rest of the world, the Company is required to negotiate in good faith a reasonable royalty that the Company will be obligated to pay to Green Cross for such license. Under the terms of the agreement, the Company is required to continue to develop and to use commercially reasonable efforts to obtain regulatory approval for AGS-003 in the United States. 

 

The agreement will terminate upon expiration of the royalty term, which is 15 years from the first commercial sale, upon which all licenses will become fully paid up perpetual non-exclusive licenses. Either party may terminate the agreement for the other party’s uncured material breach or if specified conditions occur relating to the other party’s insolvency or bankruptcy and the Company may terminate the agreement if Green Cross challenges or assists a third party in challenging specified patent rights of the Company. If Green Cross terminates the agreement upon the Company’s material breach or bankruptcy, Green Cross is entitled to terminate the Company’s licenses to improvements and retain its licenses from the Company and to pay the Company substantially reduced milestone and royalty payments following such termination.

 

Medinet License Agreement

 

In December 2013, the Company entered into a license agreement with Medinet Co., Ltd. This agreement was subsequently novated, amended and restated among the Company, Medinet Co., Ltd. and MEDcell Co., Ltd. in October 2014. Pursuant to the novation, Medinet Co., Ltd. assigned and transferred all of its rights and obligations under the original license agreement, including the rights to receive payments under the $9.0 million note in favor of Medinet Co., Ltd., to MEDcell Co., Ltd. without any substantive change in the underlying rights or obligations. Medinet Co., Ltd. and MEDcell Co., Ltd. together are referred to herein as “Medinet.” Under this agreement, the Company granted Medinet an exclusive, royalty-free license to manufacture in Japan AGS-003 and other products using the Company’s Arcelis technology solely for the purpose of the development and commercialization of AGS-003 and these other products for the treatment of mRCC. The Company refers to this license as the manufacturing license.

 

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In addition, under this agreement, the Company granted Medinet an option to acquire a nonexclusive, royalty-bearing license under the Company’s Arcelis technology to sell in Japan AGS-003 and other products for the treatment of mRCC. The Company refers to the option as the sale option and the license as the sale license. This option expired on April 30, 2016. As a result, Medinet may only manufacture AGS-003 and these other products for the Company or its designee. The Company and Medinet have agreed to negotiate in good faith a supply agreement under which Medinet would supply the Company or its designee with AGS-003 and these other products for development and sale for the treatment of mRCC in Japan. During the term of the manufacturing license, the Company may not manufacture AGS-003 or these other products for the Company or any designee for development or sale for the treatment of mRCC in Japan.

 

In consideration for the manufacturing license, Medinet paid the Company $1.0 million. Medinet also loaned the Company $9.0 million in connection with the Company entering into the agreement. The Company has agreed to use these funds in the development and manufacturing of AGS-003 and the other products. Medinet also agreed to pay the Company milestone payments of up to a total of $9.0 million upon the achievement of developmental and regulatory milestones and $5.0 million upon the achievement of a sales milestone related to AGS-003 and these products. Under the terms of the note and the manufacturing license agreement, any milestone payments related to the developmental and regulatory milestones that become due will be applied first to the repayment of the loan. The first milestone with a $1.0 million payment was achieved in July 2015 and the second milestone with a $2.0 million payment was achieved in June 2016, reducing the outstanding principal of the loan as of September 30, 2016 to $6.0 million.

 

In December 2013, in connection with the manufacturing license agreement with Medinet, the Company borrowed $9.0 million pursuant to an unsecured promissory note that bears interest at a rate of 3.0% per annum. The principal and interest under the note are due and payable on December 31, 2018. The Company has the right to prepay the loan at any time. If the Company has not repaid the loan by December 31, 2018, then the Company has agreed to grant to Medinet a non-exclusive, royalty-bearing license to make and sell Arcelis products in Japan for the treatment of cancer. In such event, the amounts owing under the loan as of December 31, 2018 may constitute pre-paid royalties under the license or would be due and payable. Royalties under this license would be paid until the expiration of the licensed patent rights in Japan at a rate to be negotiated. If the Company and Medinet cannot agree on the royalty rate, the Company and Medinet have agreed to submit the matter to arbitration.

 

The Company recorded the initial $1.0 million payment from Medinet as a deferred liability. In addition, because the $9.0 million promissory note was issued at a below market interest rate, the Company allocated the proceeds of the loan between the manufacturing license agreement and the debt at the time of issuance. Accordingly, as of December 31, 2013, the date of borrowing, the Company recorded $6.9 million to notes payable, based upon an effective interest rate of 8.0%, and $2.1 million as a deferred liability. During the year ended December 31, 2015, the Company recognized a $1.0 million milestone payment as deferred revenue under the license agreement and reduced the related note payable by $0.8 million and the deferred liability by $0.2 million. During the nine months ended September 30, 2016, the Company recognized a $2.0 million milestone payment as deferred revenue under this license agreement and reduced the related note payable by $1.5 million and the deferred liability by $0.5 million. As of September 30, 2016, the amount of the note payable was $6.3 million, including $1.7 million accrued interest. As of September 30, 2016, the total deferred liability associated with the Medinet note was $5.3 million.

 

The agreement will terminate upon expiration of the royalty term, upon which all licenses will become fully paid up, perpetual non-exclusive licenses. Either party may terminate the agreement for the other party’s uncured material breach or if specified conditions occur relating to the other party’s insolvency or bankruptcy, and the Company may terminate the agreement if Medinet challenges or assists a third party in challenging specified patent rights of the Company. If Medinet terminates the agreement upon the Company’s material breach or bankruptcy, Medinet is entitled to terminate the Company’s licenses to improvements and retain its royalty-bearing licenses from the Company.

 

Lummy License Agreement

 

On April 7, 2015, the Company and Lummy (Hong Kong) Co. Ltd. (“Lummy HK”), a wholly owned subsidiary of Chongqing Lummy Pharmaceutical Co. Ltd., entered into a license agreement (the “License Agreement”) whereby the Company granted to Lummy HK an exclusive license under the Arcelis technology, including patents, know-how and improvements to manufacture, develop and commercialize products for the treatment of cancer (“Licensed Product”) in China, Hong Kong, Taiwan and Macau (the “Territory”). Under the License Agreement, Lummy HK also has a right of first negotiation with respect to a license under the Arcelis technology for the treatment of infectious diseases in the Territory.

 

Under the terms of the License Agreement, the parties will share relevant data, and the Company will have a right to reference Lummy HK data for purposes of its development programs under the Arcelis technology. In addition, Lummy HK has granted to the Company an exclusive, royalty-free license under and to any and all Lummy HK improvements to the Arcelis technology conceived or reduced to practice by Lummy HK (“Lummy HK Improvements”) and Lummy HK data to develop and/or commercialize products (“Arcelis-Based Products”) outside the Territory, an exclusive, royalty-free license under and to any and all investigational new drug applications ("INDs") and other regulatory approvals and Lummy HK trademarks used for an Arcelis-Based Product to develop and/or commercialize an Arcelis-Based Product outside the Territory and a non-exclusive, worldwide, royalty-free license under any Lummy HK Improvements and Lummy HK data to manufacture Arcelis-Based Products anywhere in the world. Lummy HK has the right to reference the Company’s data, INDs and other regulatory filings and submissions for the purpose of developing and obtaining regulatory approval of Licensed Products in the Territory.

 

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Pursuant to the License Agreement, Lummy HK will pay the Company royalties on net sales and up to an aggregate of $20.0 million upon the achievement of manufacturing, regulatory and commercial milestones. The License Agreement will terminate upon expiration of the last to expire royalty term for all Arcelis-Based Products, with each royalty term being the longer of the expiration of the last valid patent claim covering the applicable Arcelis-Based Product and 10 years from the first commercial sale of such Arcelis-Based Product. Either party may terminate the License Agreement for the other party’s uncured material breach or if specified conditions occur relating to the other party’s insolvency or bankruptcy. The Company may terminate the License Agreement if Lummy HK challenges or assists a third party in challenging specified patent rights of the Company. If Lummy HK terminates the License Agreement upon the Company’s material breach or bankruptcy, Lummy HK is entitled to terminate the licenses it granted to the Company and retain its licenses from the Company with respect to Arcelis-Based Products then in development or being commercialized, subject to Lummy HK’s continued obligation to pay royalties and milestones with respect to such Arcelis-Based Products.

 

12. Net Loss Per Share

 

Basic and diluted net loss per share of common stock was determined by dividing net loss by the weighted average of shares of common stock outstanding during the period. The Company’s potentially dilutive shares, which include options to purchase common stock and warrants, have not been included in the computation of diluted net loss per share for all periods as the result would be antidilutive.

 

The following table presents the computation of basic and diluted net loss per share of common stock:

 

    Three Months Ended
September 30,
  Nine Months Ended
September 30,
    2015   2016   2015   2016
Net loss   $ (20,078,568 )   $ (12,246,841 )   $ (57,229,601 )   $ (37,673,274 )
Weighted average common shares outstanding, basic and diluted     20,704,163       37,938,213       20,333,835       28,903,427  
                                 
Net loss per share, basic and diluted   $ (0.97 )   $ (0.32 )   $ (2.81 )   $ (1.30 )

 

The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding, as they would be antidilutive:

 

    Three Months Ended
September 30,
  Nine Months Ended
September 30,
    2015   2016   2015   2016
Stock options outstanding     3,372,015       4,760,365       3,088,622       4,013,193  
Warrants outstanding     82,781       11,247,575       82,781       4,921,978  

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes appearing in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q. In addition to historical information, some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, future financial performance, expense levels and liquidity sources, includes forward-looking statements that involve risks and uncertainties. You should read “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Overview

 

We are an immuno-oncology company focused on the development and commercialization of individualized immunotherapies for the treatment of cancer and infectious diseases based on our proprietary technology platform called Arcelis.

 

Our most advanced product candidate is AGS-003, which we are developing for the treatment of metastatic renal cell carcinoma, or mRCC, and other cancers. We are currently conducting a pivotal Phase 3 clinical trial of AGS-003 plus sunitinib or another targeted therapy for the treatment of newly diagnosed mRCC under a special protocol assessment, or SPA, with the Food and Drug Administration, or FDA. We refer to this trial as the ADAPT trial. We opened the ADAPT trial for enrollment in January 2013, dosed the first patient in May 2013 and completed enrollment of the trial in July 2015. Based upon the actual rate of enrollment and projected event rate as defined in the protocol, we anticipate having a sufficient number of events to permit the primary analysis and assessment of overall survival to occur in the first half of 2017. In June 2016, the independent data monitoring committee, or IDMC, for the ADAPT trial recommended that the ADAPT trial continue based on results of the IDMC’s scheduled interim data review. We expect that the next IDMC meeting will occur in connection with the Genitourinary Cancers Symposium in February 2017. We are also supporting investigator-initiated Phase 2 trials in patients with early stage RCC and non-small cell lung cancer and plan to support investigator-initiated trials of AGS-003 in muscle invasive bladder cancer and in combination with a checkpoint inhibitor in mRCC.

 

We are developing AGS-004, our second most advanced Arcelis-based product candidate, for the treatment of HIV. We have completed Phase 1 and Phase 2 trials funded by government grants and a Phase 2b trial that was funded in full by the National Institutes of Health, or NIH, and the National Institute of Allergy and Infectious Diseases, or NIAID, under a $39.8 million agreement. We are currently supporting an ongoing investigator-initiated clinical trial of AGS-004 in adult HIV patients evaluating the use of AGS-004 in combination with vorinostat, a latency reversing drug for HIV eradication, and plan to support an investigator-initiated Phase 2 clinical trial of AGS-004 evaluating AGS-004 for long-term viral control in pediatric patients provided that results from our ongoing trial in adult HIV patients are favorable.

 

We have devoted substantially all of our resources to our drug development efforts, including advancing our Arcelis platform, conducting clinical trials of our product candidates, protecting our intellectual property and providing general and administrative support for these operations. We have not generated any revenue from product sales and, to date, have funded our operations primarily through public offerings of our common stock and warrants, a venture loan, private placements of common stock, preferred stock and warrants, convertible debt financings, government contracts, government and other third party grants and license and collaboration agreements. From inception in May 1997 through September 30, 2016, we have raised a total of $494.4 million in cash, including:

 

$331.6 million from the sale of our common stock, convertible debt, warrants and preferred stock;

 

$32.9 million from the licensing of our technology;

 

$104.9 million from government contracts, grants and license and collaboration agreements; and

 

$25.0 million from our venture loan and security agreement, or the Loan Agreement, with Horizon Technology Finance Corporation and Fortress Credit Co LLC, or the Lenders.

 

On August 2, 2016, we issued and sold 9,090,909 shares of common stock and warrants to purchase an aggregate of 6,818,181 shares of common stock in an underwritten public offering at a price to the public of $5.50 per share and accompanying warrant. The shares of common stock and warrants were sold in combination, with one warrant to purchase up to 0.75 of a share of common stock accompanying each share of common stock sold. The warrants have an exercise price of $5.50 per share, became immediately exercisable upon issuance and will expire on August 2, 2021. The aggregate net proceeds to us of the offering were approximately $48.2 million after deducting underwriting discounts and commissions and offering expenses.

 

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We have incurred losses in each year since our inception in May 1997. Our net loss was $53.3 million for the year ended December 31, 2014, $74.8 million for the year ended December 31, 2015 and $37.7 million for the nine months ended September 30, 2016. As of September 30, 2016, we had an accumulated deficit of $316.6 million. Substantially all of our operating losses have resulted from costs incurred in connection with our development programs and from general and administrative costs associated with our operations.

 

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially if and as we:

 

continue our ongoing ADAPT trial of AGS-003 for the treatment of mRCC;

 

continue to support ongoing investigator-initiated clinical trials of AGS-003 and AGS-004;

 

support planned investigator-initiated clinical trials of AGS-003 and AGS-004;

 

initiate and conduct additional clinical trials of AGS-003 and AGS-004 for the treatment of cancers and HIV;
   
seek regulatory approvals for our product candidates that successfully complete clinical trials;

 

lease, build out and equip a facility or otherwise arrange for the commercial manufacture of our products based on our Arcelis platform;

 

establish a sales, marketing and distribution infrastructure to commercialize products for which we may obtain regulatory approval;

 

maintain, expand and protect our intellectual property portfolio;

 

continue our other research and development efforts;

 

hire additional clinical, quality control, scientific and management personnel; and

 

add operational, financial and management information systems and personnel, including personnel to support our product development and planned commercialization efforts.

 

We have no external sources of funds other than our contract with the NIH and NIAID (as described below). We do not expect to generate significant additional funds or product revenue unless and until we successfully complete development, obtain marketing approval and commercialize our product candidates, either alone or in collaboration with third parties, which we expect will take a number of years and is subject to significant uncertainty. Accordingly, we will need to raise additional capital prior to the commercialization of AGS-003, AGS-004 or any of our other product candidates. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our operating activities through a combination of equity offerings, debt financings, government contracts, government and other third party grants or other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds through these means when needed, on favorable terms or at all.

 

NIH Funding

 

In September 2006, we entered into a multi-year research contract with the NIH and NIAID to design, develop and clinically test an autologous HIV immunotherapy capable of eliciting therapeutic immune responses. We have used funds from this contract to develop AGS-004, including to fund in full our Phase 2b clinical trial of AGS-004. On June 29, 2016, a contract modification was agreed to that extended the NIH and NIAID’s commitment under the contract to July 31, 2018. We have agreed to a statement of work under the contract, and are obligated to furnish all the services, qualified personnel, material, equipment, and facilities not otherwise provided by the U.S. government needed to perform the statement of work.

 

Under this contract, as amended, the NIH and NIAID have committed to fund up to a total of $39.8 million, including reimbursement of direct expenses and allocated overhead and general and administrative expenses of up to $38.4 million and payment of other specified amounts totaling up to $1.4 million upon our achievement of specified development milestones. This amount includes a September 2014 modification of the contract under which the NIH and NIAID agreed to fund up to an additional $500,000 to cover a portion of the manufacturing costs of the planned Phase 2 clinical trial of AGS-004 for long-term viral control in pediatric patients. Since September 2010, we have received reimbursement of our allocated overhead and general and administrative expenses at provisional indirect cost rates equal to negotiated provisional indirect cost rates agreed to with the NIH and NIAID in September 2010. These provisional indirect cost rates are subject to adjustment based on our actual costs pursuant to the agreement with the NIH and NIAID and may result in additional payments to us from the NIH and NIAID to reflect our actual costs since September 2010.

 

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We have recorded revenue of $37.8 million through September 30, 2016 under the NIH and NIAID contract. This contract is the only arrangement under which we have generated substantial revenue. As of September 30, 2016, there was up to $2.0 million of potential revenue remaining to be earned under the agreement with the NIH and NIAID.

 

Our Development Programs

 

The following table summarizes our development programs for AGS-003 and AGS-004.

 

Product Candidate   Primary Indication   Status
AGS-003   mRCC    Ongoing ADAPT trial; enrollment completed in July 2015; data expected in the first half of 2017
           
        Planned investigator-initiated Phase 2 clinical trial, in combination with a checkpoint inhibitor, expected to open for enrollment in the first half of 2017
           
    Early stage RCC  (neoadjuvant)   Ongoing investigator-initiated Phase 2 clinical trial; initial data expected in the first half of 2017
           
    Advanced solid tumors   Ongoing investigator-initiated Phase 2 clinical trial in non-small cell lung cancer
           
        Planned investigator-initiated Phase 2 clinical trial in muscle invasive bladder cancer, expected to open for enrollment by the end of 2016
           
AGS-004   HIV   Ongoing second stage of investigator-initiated clinical trial in combination with vorinostat for HIV eradication
           
        Decision to initiate planned investigator-initiated Phase 2 clinical trial for long-term viral control in pediatric patients expected in 2017

 

We hold all commercial rights to AGS-003 and AGS-004 in all geographies other than rights to AGS-003 in Russia and the other states comprising the Commonwealth of Independent States, which we exclusively licensed to Pharmstandard International S.A., or Pharmstandard, rights to AGS-003 for the treatment of mRCC in South Korea, which we exclusively licensed to Green Cross Corp., or Green Cross, and rights to AGS-003 in China, Hong Kong, Taiwan and Macau, which we exclusively licensed to Lummy (Hong Kong) Co. Ltd., or Lummy HK. We have granted to MEDcell Co., Ltd., a wholly-owned subsidiary of Medinet Co. Ltd., hereinafter referred to together as “Medinet,” an exclusive license to manufacture in Japan AGS-003 for the treatment of mRCC.

 

AGS-003

 

We are developing AGS-003 for the treatment of mRCC and other cancers. We are currently conducting the ADAPT trial of AGS-003 plus sunitinib / targeted therapy for the treatment of newly diagnosed mRCC, versus sunitinib/targeted therapy alone, in a protocol developed under an SPA with the FDA. We opened the ADAPT trial for enrollment in January 2013 and dosed the first patient in May 2013. In July 2015 we completed enrollment in the trial, enrolling 462 patients with the goal of generating 290 events for the primary endpoint of overall survival. We enrolled these patients at 107 clinical sites in North America, Europe and Israel. Under the trial protocol, these patients were randomized between the AGS-003 plus sunitinib / targeted therapy combination arm and the sunitinib / targeted therapy alone control arm on a two-to-one basis. In June 2016, the IDMC for the ADAPT trial recommended that the ADAPT trial continue based on results of the IDMC’s scheduled interim data review. We expect that the next IDMC meeting will occur in connection with the Genitourinary Cancers Symposium in February 2017. Based on internal projections, we believe that we have reached more than half of the targeted number of events for the ADAPT trial’s overall survival primary endpoint. Based upon the actual rate of enrollment and the projected event rate as defined in the protocol, we anticipate having a sufficient number of events to permit the primary analysis and assessment of overall survival to occur in the first half of 2017.

 

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In addition, in mRCC we plan to support an investigator-initiated clinical trial of AGS-003 in combination with a checkpoint inhibitor that we expect will open for enrollment in the first half of 2017.

 

We are also supporting an ongoing investigator-initiated Phase 2 clinical trial designed to evaluate neoadjuvant treatment with AGS-003 in patients with early stage, localized RCC prior to nephrectomy. This trial was opened for enrollment in late 2014 and four patients were enrolled as of September 30, 2016. We expect that a total of 10 patients will be enrolled in this trial. This trial provides the opportunity to observe the impact of AGS-003 on the immune response in both the peripheral blood and in the primary tumor that is removed after AGS-003 treatment, the latter as evidenced by the presence of tumor infiltrating lymphocytes in the tumor.

 

We believe that AGS-003 may be capable of treating a wide range of cancers and are planning to evaluate AGS-003 in clinical trials in additional cancer indications. We are supporting an investigator-initiated Phase 2 clinical trial of AGS-003 in patients with non-small cell lung cancer, or NSCLC, that was opened for enrollment in the first quarter of 2016. In the trial, the safety, efficacy and immunologic effects of AGS-003 when combined with platinum-based chemotherapy and radiation will be evaluated in approximately 20 NSCLC patients. In the trial, AGS-003 will be administered either concurrently with chemotherapy and with or without radiation, or sequentially with chemotherapy and with or without radiation, according to the patient’s assigned treatment arm. We are conducting this trial in NSCLC patients because NSCLC is a tumor type reported to have a high number of mutated targets for the immune system, which could make it more susceptible to AGS-003’s mechanism of action. We also believe platinum-based chemotherapy has immunomodulatory effects by downregulating immunosuppressive regulatory T-cells which may lead to an additive or synergistic effect with AGS-003.

 

We also plan to support an additional investigator-initiated Phase 2 clinical trial of AGS-003 in muscle invasive bladder cancer, which we expect to open for enrollment by the end of 2016. The trial has two phases: a pre-treatment phase and a treatment phase. In the pre-treatment phase, tumor tissue will be obtained via a transurethral resection of the bladder tumor, which will then be used to extract RNA for the manufacture of AGS-003. In the treatment phase, AGS-003 will be given before tumor resection and combined with standard-of-care cytotoxic chemotherapy, consisting of cisplatin and gemcitabine. Booster doses of AGS-003 will continue after tumor resection. As with the neoadjuvant RCC trial, we expect that the trial will provide us with the opportunity to observe the impact of AGS-003 on the immune response in both the peripheral blood and the primary tumor, the latter as evidenced by the presence of tumor infiltrating lymphocytes in the tumor.

 

AGS-004

 

We are developing AGS-004 for the treatment of HIV and are focusing this program on the use of AGS-004 in combination with other therapies for the eradication of HIV. We believe that by combining AGS-004 with therapies that are being developed to expose the virus in latently infected cells to the immune system, we can potentially eradicate the virus. The current standard-of-care, antiretroviral drug therapy, or ART, can reduce levels of HIV in a patient’s blood, increase the patient’s life expectancy and improve the patient’s quality of life. However, ART cannot eliminate the virus, which persists in latently infected cells, where it remains undetectable by the immune system and can lead to disease recurrence. In addition, ART requires daily, life-long treatment which can have significant side effects and impact patients’ quality of life.

 

We are supporting an investigator-initiated clinical trial of AGS-004 in adult HIV patients to evaluate the use of AGS-004 in combination with the latency reversing drug vorinostat for the eradication of HIV at the University of North Carolina. Vorinostat is marketed under the name Zolinza by Merck & Co. Inc. for the treatment of cutaneous T-cell lymphoma. This trial is being conducted in two stages. Stage 1 of this trial, which was designed to study immune response kinetics to AGS-004 in patients on continuous ART, has been completed. Data from Stage 1 were used to better define the optimal dosing strategy for the combination of AGS-004 and vorinostat in the ongoing Stage 2 phase of this trial. We expect that up to 12 adult HIV patients will be studied in Stage 2. These patients will receive alternating courses of AGS-004 and vorinostat, and will continue ART throughout the study. In July 2016, the first patient in Stage 2 was dosed. The patient clinical costs for the first stage of this trial were funded by Collaboratory of AIDS Researchers for Eradication, or CARE. The second stage of the trial is being funded by a federal research grant from the Division of AIDS of the National Institute of Allergy and Infectious Diseases at NIH.

 

We also plan to explore the use of AGS-004 monotherapy to provide long-term control of HIV viral load in otherwise immunologically healthy patients and eliminate their need for ART. Accordingly, if initial data from stage 2 of the ongoing adult eradication study are favorable, we plan to support an investigator-initiated Phase 2 clinical trial of AGS-004 monotherapy in pediatric patients infected with HIV who have otherwise healthy immune systems and have been treated with ART since birth or shortly thereafter and, as a result, are lacking the antiviral memory T-cells to combat the virus. The commencement of this trial is subject to approval of the protocol by the principal investigator(s), institutional review boards, the IMPAACT Network leadership and the FDA and to the agreement by the NIH to fund the trial costs not related to AGS-004 manufacturing. Assuming the supportive data and the necessary approvals are obtained, we expect this trial to open in 2017.

 

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Manufacturing

 

We currently have manufacturing suites in our facility located at our corporate headquarters in Durham, North Carolina. We manufacture our Arcelis-based product candidates for research and development purposes and for clinical trials at this facility. In August 2014, we entered into a ten-year lease agreement with renewal options with the developer, TKC LXXII, LLC, or TKC. Under the lease agreement, we agreed to lease certain land and an approximately 125,000 square-foot building to be constructed in Durham County, North Carolina, which we refer to as Centerpoint. We intended this facility to house our corporate headquarters and commercial manufacturing. The shell of the new facility was constructed on a build-to-suit basis in accordance with agreed upon specifications and plans and was completed in June 2015. However, the build-out and equipping of the interior of the facility has not been completed as we explore potential financing arrangements.

 

Under the lease agreement, we had an option to purchase the property. In February 2015, we exercised this purchase option and entered into a Purchase and Sale Agreement with TKC. The purchase price to be paid by us was $7.4 million plus the amount of any additional costs incurred by TKC as a result of changes requested by us, for which we had paid $1.7 million as of September 30, 2016, and the amount of any improvement allowances advanced to us by TKC prior to the closing. Under the terms of the Purchase and Sale Agreement, we had until October 31, 2016 to consummate the purchase of the property. We did not purchase the property by such date. As a result, we have no further right to purchase the property and will remain subject to the lease under the Lease Agreement.

 

We continue to explore financing arrangements which could enable us to seek to purchase the Centerpoint facility if the landlord is willing to sell the property to us. We are also exploring other alternatives for the commercial supply of our products. These alternatives include both internal manufacturing solutions as well as potential contractual arrangements with contract manufacturing organizations. We expect that we will enter into arrangements for the commercial manufacture of our products during the fourth quarter of 2016. Under either the Centerpoint option or one of the alternatives, we expect that it would take approximately nine to 12 months to complete the build-out and equipping of a commercial manufacturing facility and that such arrangements would likely involve material obligations. However, other than with respect to our lease with TKC for Centerpoint, we have not entered into any binding arrangement with any party with respect to the lease, build-out and equipping of a manufacturing facility or other arrangements for commercial manufacturing . There can be no assurance that we will enter into arrangements on the terms previously available to us, on a timely basis or at all.

 

We plan to establish manual and automated manufacturing processes in the commercial manufacturing facility. However, we have determined to delay the implementation of our automated manufacturing process until after commercialization of AGS-003, and thus plan to seek marketing approval of AGS-003 and, if approved, to initially commercially supply AGS-003 using our manual manufacturing process. Prior to implementing commercial manufacturing of AGS-003, we will be required to demonstrate that the commercial manufacturing facility is constructed and operated in accordance with current good manufacturing practice. We will also be required to show the comparability between AGS-003 that we produce using the manual processes in our current facility and AGS-003 produced using the manual process in the new facility.

 

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Results of Operations

 

Comparison of the Three and Nine Months Ended September 30, 2015 with the Three and Nine Months Ended September 30, 2016

 

The following table summarizes the results of our operations for each of the three and nine month periods ended September 30, 2015 and 2016, together with the changes in those items in dollars and as a percentage:

 

    Three Months Ended
September 30,
  $   %   Nine Months Ended
September 30,
  $   %
    2015   2016   Change   Change   2015   2016   Change   Change
    (in thousands)
Revenue   $ 158     $ 147     $ (11 )     (7.3 )%   $ 445     $ 782     $ 337       75.9 %
Operating expenses                                                                
Research and development     17,227       9,340       (7,887 )     (45.8 )%     48,079       28,006       (20,073 )     (41.7 )%
General and administrative     2,689       3,011       322       11.9 %     7,970       9,375       1,405       17.6 %
                                                                 
Total operating expenses     19,916       12,351       (7,565 )     (38.0 )%     56,049       37,381       (18,668 )     (33.3 )%
                                                                 
Loss from operations     (19,758 )     (12,204 )     7,554       38.2 %     (55,604 )     (36,599 )     19,005       34.2 %
                                                                 
Interest income     4       21       17       332.8 %     23       24       1       5.3 %
Interest expense     (325 )     (448 )     (123 )     (38.0 )%     (1,646 )     (1,482 )     164       9.9 %
Decrease in fair value of warrants           385       385       *             385       385       *  
Other expense           (1 )     (1 )     *       (3 )     (1 )     2       *  
                                                                 
Net loss   $ (20,079 )   $ (12,247 )   $ 7,832       39 %   $ (57,230 )   $ (37,673 )   $ 19,557       34.2 %

_______________

* Not meaningful

 

Revenue

 

To date, we have not generated revenue from the sale of any products. Substantially all of our revenue has been derived from our NIH and NIAID contract. We may generate revenue in the future from government contracts and grants, payments from future license or collaboration agreements and product sales. We expect that any revenue we generate will fluctuate from quarter to quarter.

 

Revenue was $158,349 for the three months ended September 30, 2015, compared with $146,756 for the three months ended September 30, 2016, a decrease of $11,593, or 7.3%. Revenue was $444,511 for the nine months ended September 30, 2015, compared with $781,828 for the nine months ended September 30, 2016, an increase of $337,317, or 75.9%. The increase for the nine months ended September 30, 2016 resulted from higher reimbursement under our NIH and NIAID contract in the respective 2016 period and was primarily related to the achievement of certain specified development milestones during 2016.

 

Research and Development Expenses

 

Since our inception, we have focused our resources on our research and development activities, including conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for our product candidates. We recognize our research and development expenses as they are incurred. Our research and development expenses consist primarily of:

 

salaries and related expenses for personnel in research and development functions;

 

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fees paid to consultants and clinical research organizations, or CROs, including in connection with our clinical trials, and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work and statistical compilation and analysis;

 

commercial manufacturing development consisting of costs incurred under our development agreement with Invetech Pty Ltd, or Invetech, under which Invetech has agreed to develop and provide prototypes of the automated production system to be used for the manufacture of our Arcelis-based products;

 

allocation of facility lease and maintenance costs;

 

costs incurred under our development agreement with Saint-Gobain Performance Plastics Corporation, or Saint-Gobain, to develop a range of disposables for use in the automated production system;

 

depreciation of leasehold improvements, laboratory equipment and computers;

 

costs related to production of product candidates for clinical trials;

 

costs related to compliance with regulatory requirements;

 

consulting fees paid to third parties related to non-clinical research and development;

 

costs related to stock options or other stock-based compensation granted to personnel in research and development functions; and

 

acquisition fees, license fees and milestone payments related to acquired and in-licensed technologies.

 

The table below summarizes our direct research and development expenses by program for the periods indicated. Our direct research and development expenses consist principally of external costs, such as fees paid to investigators, consultants, central laboratories and CROs, including in connection with our clinical trials, and related clinical trial fees. Research and development expenses also include commercial manufacturing development costs consisting primarily of costs incurred under our development agreements with Invetech and Saint-Gobain to develop and provide prototypes of the automated production system to be used for the manufacture of our Arcelis-based products. We have been developing AGS-003 and AGS-00, in parallel, and typically use our employee and infrastructure resources across multiple research and development programs. We do not allocate salaries, stock-based compensation, employee benefit or other indirect costs related to our research and development function to specific product candidates. Those expenses are included in “Indirect research and development expense” in the table below.

 

    Three Months Ended 
September 30,
  Nine Months Ended 
September 30,
    2015   2016   2015   2016
    (in thousands)
Direct research and development expense by program:                                
AGS-003   $ 5,429     $ 2,567     $ 16,482     $ 8,224  
AGS-004     79       77       256       186  
Other           3       40       3  
                                 
Total direct research and development program expense     5,508       2,647       16,778       8,413  
Commercial manufacturing development expense     5,751       1,407       15,499       1,926  
Indirect research and development expense     5,968       5,286       15,802       17,667  
                                 
Total research and development expense   $ 17,227     $ 9,340     $ 48,079     $ 28,006  

 

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Three months ended September 30, 2015 and 2016. Research and development expenses were $17.2 million for the three months ended September 30, 2015, compared with $9.3 million for the three months ended September 30, 2016, a decrease of $7.9 million, or 45.8%. The decrease in research and development expense reflects a $2.9 million decrease in direct research and development expense, a $4.3 million decrease in commercial manufacturing development expense and a $0.7 million decrease in indirect research and development expense.

 

The $2.9 million decrease in direct research and development expenses resulted primarily from the following:

 

Direct research and development expense for AGS-003 decreased from $5.4 million for the three months ended September 30, 2015 to $2.6 million in the three months ended September 30, 2016. This decrease primarily reflects the completion of patient enrollment in the ongoing ADAPT trial of AGS-003 in July 2015. Significant expenses are incurred to obtain patient enrollment and then the ongoing monitoring costs generally decline as the trial progresses.

 

Direct research and development expense with respect to AGS-004 was not significantly different in the three months ended September 30, 2015 compared with the three months ended September 30, 2016.

 

The $4.3 million decrease in commercial manufacturing development expense resulted primarily from our decision to significantly reduce our spending and activity related to the automated manufacturing process. We commenced our commercial manufacturing development efforts during 2014 and such activity increased progressively through the end of 2015. During the fourth quarter of 2015, we significantly reduced our spending and activity for commercial manufacturing development, which resulted in the decrease in such expenses during the three months ended September 30, 2016 compared with the three months ended September 30, 2015.

 

The $0.7 million decrease in indirect research and development expense was primarily due to lower personnel costs, as we had 111 employees engaged in research and development activities as of September 30, 2015 compared with 96 employees as of September 30, 2016.

 

Nine Months ended September 30, 2015 and 2016 . Research and development expenses were $48.1 million for the nine months ended September 30, 2015, compared with $28.0 million for the nine months ended September 30, 2016, a decrease of $20.1 million, or 41.7%. The decrease in research and development expense reflects an $8.4 million decrease in direct research and development expense, a $13.6 million decrease in commercial manufacturing development expense and a $1.9 million increase in indirect research and development expense.

 

The $8.4 million decrease in direct research and development expenses resulted primarily from the following:

 

Direct research and development expense for AGS-003 decreased from $16.5 million for the nine months ended September 30, 2015 to $8.2 million in the nine months ended September 30, 2016 primarily reflecting the completion of patient enrollment in the ADAPT trial of AGS-003 in July 2015.

 

Direct research and development expense with respect to AGS-004 was not significantly different in the nine months ended September 30, 2015 compared with the nine months ended September 30, 2016.

 

The $13.6 million decrease in research and development expense related to our commercial manufacturing development efforts reflect our determination during the fourth quarter of 2015 to significantly reduce our spending and activity related to the automated manufacturing process.

 

The $1.9 million increase in indirect research and development expense was partially due to higher personnel costs of $1.4 million as we had 111 employees engaged in research and development activities as of September 30, 2015 compared with 118 employees as of the beginning of the nine months ended September 30, 2016, and the termination costs associated with our April 2016 reduction in force. Termination costs including severance and the partial acceleration of certain stock options for these employees totaled $1.2 million of the $1.4 million increase in personnel costs. Additionally, occupancy costs were $0.5 million higher in the 2016 period primarily due to rent incurred under the TKC lease agreement and higher depreciation.

 

The successful development of our clinical and preclinical product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our clinical or preclinical product candidates or the period, if any, in which material net cash inflows from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

 

  the scope, rate of progress, expense and results of our ongoing clinical trials;

 

  the scope, rate of progress, expense and results of additional clinical trials that we may conduct;

 

  the scope, rate of progress, expense and results of our commercial manufacturing development efforts;

 

  other research and development activities; and

 

  the timing of regulatory approvals.

 

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A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries and related costs for employees in executive, operational and finance, information technology and human resources functions. Other significant general and administrative expenses include allocation of facilities costs, professional fees for accounting and legal services and expenses associated with obtaining and maintaining patents.

 

General and administrative expenses were $2.7 million for the three months ended September 30, 2015, compared with $3.0 million for the three months ended September 30, 2016, an increase of $0.3 million or 11.9%. This increase was primarily due to an additional $0.2 million in personnel costs, including salaries, benefits and stock-based compensation and $0.1 million of occupancy expenses and additional outside services resulting from legal fees.

 

General and administrative expenses were $8.0 million for the nine months ended September 30, 2015, compared with $9.4 million for the nine months ended September 30, 2016, an increase of $1.4 million or 17.6%. This increase was primarily due to an additional $0.9 million in personnel costs, including salaries, benefits and stock-based compensation, $0.1 million of additional consulting costs resulting from the implementation of a new enterprise resource planning, or ERP system, $0.3 million of additional outside services resulting primarily from legal fees and an increase of $0.1 million in occupancy expenses.

 

We expect that our general and administrative expenses will increase with the continued development and potential commercialization of our product candidates.

 

Interest Expense

 

Interest expense was $0.3 million for the three months ended September 30, 2015, compared with $0.4 million for the three months ended September 30, 2016. Total interest cost during the three months ended September 30, 2016 was $1.0 million. Of this amount, $0.5 million was capitalized as construction-in-progress resulting in interest expense of $0.4 million during the period. Total interest cost during the three months ended September 30, 2015 was $0.9 million. Of this amount, $0.5 million was capitalized as construction-in-progress resulting in interest expense of $0.3 million during the period. Accordingly, interest expense increased by $0.1 million during the three months ended September 30, 2016 compared with the same period in 2015. The increase in total interest cost for the three months ended September 30, 2016 compared with the three months ended September 30, 2015 primarily resulted from higher outstanding indebtedness borrowed under the Loan Agreement.

 

Interest expense was $1.6 million for the nine months ended September 30, 2015, compared with $1.5 million for the nine months ended September 30, 2016. Total interest cost during the nine months ended September 30, 2016 was $2.9 million. Of this amount, $1.4 million was capitalized as construction-in-progress resulting in interest expense of $1.5 million during the period. Total interest cost during the nine months ended September 30, 2015 was $2.2 million. Of this amount, $0.5 million was capitalized as construction-in-progress resulting in interest expense of $1.6 million during the period. Accordingly, interest expense decreased by $0.2 million during the nine months ended September 30, 2016 compared with the same period in 2015. The increase in total interest cost for the nine months ended September 30, 2016 compared with the nine months ended September 30, 2015 primarily resulted from higher outstanding indebtedness borrowed under the Loan Agreement.

 

We expect that interest expense will increase as a result of interest incurred under the Loan Agreement. 

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

As of September 30, 2016, we had cash and cash equivalents of approximately $69.3 million.

 

Since our inception in May 1997 through September 30, 2016, we have funded our operations principally with $331.6 million from the sale of common stock, convertible debt, warrants and preferred stock, $32.9 million from the licensing of our technology, $104.9 million from government contracts, grants and license and collaboration agreements, and $25.0 million from the Loan Agreement.

 

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Venture Loan and Security Agreement. In September 2014, we entered into the Loan Agreement with the Lenders, under which we could borrow up to $25.0 million in two tranches of $12.5 million each.

 

We borrowed the first tranche of $12.5 million upon the closing of the loan facility in September 2014 and borrowed the second tranche of $12.5 million in August 2015 following completion of enrollment of the ADAPT trial. The per annum interest rate for each tranche is a floating rate equal to 9.25% plus the amount by which the one-month LIBOR exceeds 0.50% (effectively a floating rate equal to 8.75% plus the one-month LIBOR Rate). The total per annum interest rate shall not exceed 10.75%.

 

We made payments with respect to the first tranche of $12.5 million on an interest-only basis monthly through October 31, 2016, and are currently making monthly payments of principal and accrued interest through the scheduled maturity date for the first tranche loan on September 30, 2018. In addition, a final payment for the first tranche loan equal to $625,000 will be due on September 30, 2018, or such earlier date specified in the Loan Agreement. We have agreed to repay the second tranche of $12.5 million in 18 monthly payments of interest only until February 7, 2017, followed by 24 monthly payments of principal and accrued interest through the scheduled maturity date for the second tranche loan on February 7, 2019. In addition, a final payment of $625,000 will be due on February 7, 2019, or such earlier date specified in the Loan Agreement. In addition, we have agreed that if we repay all or a portion of the loan prior to the applicable maturity date, we will pay the Lenders a prepayment penalty fee, based on a percentage of the then outstanding principal balance, equal to 3% if the prepayment occurs on or before 24 months after the funding date thereof, 2% if the prepayment occurs more than 24 months after, but on or before 36 months after, the funding date thereof, or 1% if the prepayment occurs more than 36 months after the funding date thereof.

 

Our obligations under the Loan Agreement are secured by a first priority security interest in substantially all of our assets other than our intellectual property. We also have agreed not to pledge or otherwise encumber our intellectual property assets, subject to certain exceptions.

 

The Loan Agreement includes customary affirmative and restrictive covenants, but does not include any covenants to attain or maintain certain financial metrics, and also includes customary events of default, including payment defaults, breaches of covenants, change of control and a material adverse change default. Upon the occurrence of an event of default and following any applicable cure periods, a default interest rate of an additional 5% may be applied to the outstanding loan balances, and the Lenders may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement.

 

In connection with the Loan Agreement, we issued to the Lenders and their affiliates warrants to purchase a total of 82,780 shares of our common stock at a per share exercise price of $9.06. Upon our satisfaction of the conditions precedent to the making of the second tranche loan, the warrants became exercisable in full. The warrants will terminate on September 29, 2021 or such earlier date as specified in the warrants. 

 

Commercial Manufacturing Facility. In August 2014, we entered into the Lease Agreement with TKC. Under the Lease Agreement, we agreed to lease certain land and an approximately 125,000 square-foot building to be constructed in Durham County, North Carolina. We intended this facility to be built to house our corporate headquarters and primary manufacturing facility. The lease for the current facility expires in November 2017. The shell of the new facility was constructed on a build-to-suit basis by TKC in accordance with agreed upon specifications and plans as set forth in the Lease Agreement and at the expense of TKC, other than those costs resulting from changes requested by us for which we have paid $1.7 million as of September 30, 2016.

 

The initial term of the Lease Agreement is 10 years from the commencement date of July 1, 2015. We have the option to extend the Lease Agreement by six five-year renewal terms. Current rent payments in the second year are $47,972 per month, subject to certain fixed increases over the course of the term as set forth in the Lease Agreement.

 

Under the Lease Agreement, we had an option to purchase the property. In February 2015, we exercised this purchase option and entered into a Purchase and Sale Agreement with TKC. The purchase price to be paid by us was $7.4 million plus the amount of any additional costs incurred by TKC as a result of changes requested by us, for which we have paid $1.7 million as of September 30, 2016, and the amount of any improvement allowances advanced to us by TKC prior to the closing. Under the terms of the Purchase and Sale Agreement, we had until October 31, 2016 to consummate the purchase of the property. We did not purchase the property by such date. As a result, we have no further right to purchase the property and will remain subject to the lease under the Lease Agreement.

 

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Lummy License Agreement. On April 7, 2015, we and Lummy HK entered into a license agreement, or the License Agreement, whereby we granted to Lummy HK an exclusive license to our Arcelis technology, including patents, know-how and improvements to manufacture, develop and commercialize products for the treatment of cancer in China, Hong Kong, Taiwan and Macau.

 

In connection with the License Agreement, we entered into stock purchase agreements with Tianyi Lummy and China BioPharma of which Lummy HK’s parent company is an affiliate and limited partner, respectively.  Pursuant to the purchase agreements, the purchasers purchased an aggregate of 1,000,000 shares of our common stock at a per share price of $10.11, or approximately $10.1 million. The purchasers also agreed to purchase approximately $10.0 million in additional shares of our common stock, for a total aggregate investment of approximately $20 million, within 31 days of and subject to reaching full enrollment of our ADAPT trial of AGS-003 for the treatment of mRCC, receiving a recommendation of the review board for the continuation of our ADAPT trial following 50% of events and receiving positive feedback from the FDA on a qualified protocol to demonstrate comparability of our automated manufacturing process for AGS-003 to the manufacturing process used by us in our ADAPT trial. However, in March 2016, in connection with the agreement by Tianyi Lummy and China BioPharma to purchase approximately $10 million of shares of our common stock and warrants in our private placement financing described below, we agreed they would have no further obligation to purchase shares pursuant to the purchase agreements.

 

PIPE Financing. On March 4, 2016, we entered into a securities purchase agreement with certain investors pursuant to which we agreed to issue and sell an aggregate of up to $60 million of our common stock and warrants to purchase shares of common stock in a private placement financing. The financing was to take place in up to three tranches. At the closing of the initial tranche in March 2016, we sold and the investors purchased, for a total purchase price of approximately $19.9 million, a total of 3,652,430 shares of common stock and warrants to purchase a total of 2,739,323 shares of common stock (0.75 shares of common stock for each share of common stock purchased), based on a purchase price per share of common stock and accompanying warrant equal to $5.44375. At the closing of the second tranche in June 2016, we sold and the investors purchased, for a total purchase price of approximately $29.8 million, a total of 5,478,672 shares of common stock and warrants to purchase a total of 4,109,005 shares of common stock at the same price and on the same terms as the first tranche. The warrants issued in each closing have an exercise price of $5.35 per share and expire five years from the date of issuance. Our stockholder, Pharmstandard International S.A., or Pharmstandard, had also agreed pursuant to the securities purchase agreement that, at our option following the satisfaction of certain conditions, Pharmstandard could be required to purchase at a third closing up to approximately $10.3 million of shares of common stock (without warrants). The dollar amount committed to be purchased by Pharmstandard at the third closing was subject to reduction on a dollar-for-dollar basis for certain cash amounts raised by us after the initial closing through equity or debt financings or collaborations.  The net proceeds received from the follow-on public offering that closed on August 2, 2016 reduced in full the dollar amount committed to be purchased in the third tranche (see Item 1. Note 8 to the Financial Statements), and as a result we have no further ability to effect the closing of, and Pharmstandard has no further obligation to purchase shares in, a third tranche of the private placement financing.

 

In connection with entering into the securities purchase agreement, we entered into a registration rights agreement with the investors pursuant to which we agreed to register for resale the shares issued in the financing and the shares issuable upon exercise of the warrants issued in the financing.

 

At-the-market Offering. In May 2015, we entered into a sales agreement, or the Sales Agreement, with Cowen & Company, LLC, or Cowen, pursuant to which we may issue and sell shares of our common stock from time to time having an aggregate offering price of up to $30 million through Cowen, acting as our agent. Sales of our common stock through Cowen may be made by any method permitted that is deemed an “at the market offering” as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on or through the Nasdaq Global Market, sales made to or through a market maker other than on an exchange or otherwise, in negotiated transactions at market prices, and/or any other method permitted by law. Cowen is not required to sell any specific amount, but acts as our sales agent using commercially reasonable efforts consistent with its normal trading and sales practices. Shares sold pursuant to the Sales Agreement have been sold pursuant to a shelf registration statement, which became effective on May 14, 2015. Under the Sales Agreement, we pay Cowen a commission of up to 3% of the gross proceeds. As of November 7, 2016, we had sold 872,682 shares of common stock pursuant to the Sales Agreement, resulting in proceeds of $5.5 million, net of commissions and issuance costs.

 

Follow-On Public Offering. On August 2, 2016, we issued and sold 9,090,909 shares of common stock and warrants to purchase an aggregate of 6,818,181 shares of common stock in an underwritten public offering at a price to the public of $5.50 per share and accompanying warrant. The shares of common stock and warrants were sold in combination, with one warrant to purchase up to 0.75 of a share of common stock accompanying each share of common stock sold. The warrants have an exercise price of $5.50 per share, became immediately exercisable upon issuance and will expire on August 2, 2021. The aggregate net proceeds to us of the offering was approximately $48.2 million after deducting underwriting discounts and commissions and offering expenses.

 

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Cash Flows

 

The following table sets forth the major sources and uses of cash for the periods set forth below:

 

    Nine Months Ended
September 30,
    2015   2016
    (in thousands)
         
Net cash (used in) provided by:                
Operating activities   $ (47,472 )   $ (31,465 )
Investing activities     8,881       (9,034 )
Financing activities     21,426       103,612  
Effect of exchange rate changes on cash     (21 )     7  
                 
Net (decrease) increase in cash and cash equivalents   $ (17,186 )   $ 63,120  

 

Operating Activities .  Net cash used in operating activities of $31.5 million during the nine months ended September 30, 2016 was primarily a result of our $37.7 million net loss, partially offset by non-cash items of $4.4 million and changes in operating assets and liabilities of $1.8 million. The non-cash items primarily reflect depreciation and amortization expense of $0.7 million, compensation expense related to stock options of $3.8 million, common stock issued as payment for services of $0.2 million and amortization of debt discount of $0.1 million, partially offset by the decrease or gain on the fair value of the warrant liability of $0.4 million. Accrued expenses increased by $2.3 million and the manufacturing research and development obligation increased by $0.3 million, which increases were partially offset by a decrease in accounts payable of $0.3 million, an increase in prepaid expenses and other receivables of $0.4 million and a decrease in deferred liabilities of $0.1 million.

 

Net cash used in operating activities of $47.5 million during the nine months ended September 30, 2015 was primarily a result of our $57.2 million net loss, partially offset by non-cash items of $3.8 million and changes in operating assets and liabilities of $6.0 million. These non-cash items primarily reflect depreciation and amortization expense of $0.5 million, compensation expense related to stock options of $2.9 million, interest accrued on long-term debt of $0.1 million and $0.3 million of amortization of debt issuance costs and debt discount. Accounts payable increased by $0.6 million, accrued expenses increased by $3.1 million, long-term deferred liabilities increased by $2.3 million and the long-term portion of our manufacturing research and development obligation increased by $1.3 million, which increases were partially offset by an increase in other assets of $0.4 million and a decrease in long-term notes payable of $0.8 million.

 

Investing Activities.  Net cash provided by (used in) investing activities amounted to $8.9 million and ($9.0) million for the nine months ended September 30, 2015 and 2016, respectively. Cash provided by and used in investing activities during each of these periods primarily reflected our purchases of property and equipment and purchases, sales and maturities of short-term investments. Cash provided by investment activities during the nine months ended September 30, 2015 consisted of $18.7 million from maturities of short-term investments and a $0.6 million reduction in the restricted cash account securing a letter of credit, partially offset by $2.7 million of purchases of short-term investments and $7.7 million of purchases of property and equipment. Cash used in investment activities during the nine months ended September 30, 2016 consisted of $10.0 million of purchases of property and equipment, partially offset by proceeds of $1.0 million from maturities of short-term investments.

 

Financing Activities. Net cash provided by financing activities amounted to $21.4 million and $103.6 million for the nine months ended September 30, 2015 and 2016, respectively. Cash provided by financing activities for the nine months ended September 30, 2015 consisted of $12.5 million of loan proceeds from our Loan Agreement, proceeds of $8.6 million from the sale of common stock and $0.4 million of proceeds from the exercise of stock options and from our employee stock purchase plan, partially offset by $30,711 of payments on notes payable. Cash provided by financing activities for the nine months ended September 30, 2016 consisted primarily of proceeds of $105.2 million from the issuance and sale of common stock and warrants under our private placement financing and our follow-on public offering and from the issuance and sale of common stock pursuant to the Sales Agreement. Additionally, cash provided by financing activities also included $0.3 million of proceeds from the exercise of common stock warrants, and $0.4 million of proceeds from the exercise of stock options and from our employee stock purchase plan, partially offset by $2.2 million from the payment of stock issuance costs and a $0.1 million payment on our facility lease obligation.

 

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Other Significant Changes in the Consolidated Balance Sheet as of September 30, 2016 Compared with December 31, 2015

 

Property and equipment, net, as of September 30, 2016 increased by $15.2 million from December 31, 2015 primarily due to a $2.5 million increase in computer software recognized from the implementation of our new ERP system and $12.8 million from construction-in-progress. Accounts payable and accrued expenses as of September 30, 2016 increased by $4.4 million from December 31, 2015 primarily due to purchases of property and equipment. As of September 30, 2016, we also recognized liabilities for capital lease obligations of $2.3 million and for warrants of $21.5 million. We did not have these liabilities as of December 31, 2015.

 

Funding Requirements

 

To date, we have not generated any product revenue from our development stage product candidates. We do not know when, or if, we will generate any product revenue. We do not expect to generate significant product revenue unless or until we obtain marketing approval of, and commercialize, AGS-003 or AGS-004. At the same time, we expect our expenses to increase in connection with our ongoing activities, particularly as we continue our ADAPT trial of AGS-003, initiate additional clinical trials of AGS-003 and AGS-004, seek regulatory approval for our product candidates and lease, build out and equip a commercial manufacturing facility or otherwise arrange for commercial manufacturing. In addition, if we obtain regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. Furthermore, we expect to continue to incur additional costs associated with operating as a public company. We will need substantial additional funding in connection with our continuing operations.

 

Based on our current operating plan, we expect that our cash and cash equivalents as of September 30, 2016 and the anticipated funding under our NIH and NIAID contract will enable us to fund our operating expenses through the second quarter of 2017. We expect that our available funds will be sufficient to fund our operations until such time as there are a sufficient number of events to permit the primary analysis and assessment of overall survival in the ADAPT trial and to fund our share of the expected costs related to preparations for commercial manufacturing.

 

We expect that these funds will not, however, be sufficient to enable us to complete required activities in preparation for the submission of a biologics license application, or BLA, to the FDA for AGS-003, to commercially launch AGS-003 or to complete the build-out and equipping of a commercial manufacturing facility without entering into financing arrangements related to the facility. These expectations are based on our current operating plan under which we implemented measures to reduce our operating expenses, including reductions in spending for activities in preparation for submission of a BLA and a workforce reduction action plan designed to streamline operations and reduce our operating expenses. We intend to seek to enter into collaborations for the development, marketing and distribution of AGS-003 outside North America and of our non-oncology product candidates, including AGS-004. If we are unable to enter into any such collaborations, we may be required to implement additional measures to materially reduce our operating expenses, which could adversely affect our business and operations. It is also possible that our available funds will not enable us to reach a sufficient number of events to permit the primary analysis and assessment of overall survival from the ADAPT trial because the actual costs and timing of clinical trials are difficult to predict and are subject to substantial risks and delays.

 

We continue to explore financing arrangements, which could enable us to seek to purchase the Centerpoint facility if the landlord is willing to sell the property to us. We are also exploring other alternatives for the commercial supply of our products. These alternatives include both internal manufacturing solutions as well as potential contractual arrangements with contract manufacturing organizations. We expect that we will enter into arrangements for the commercial manufacture of our products during the fourth quarter of 2016. Under either the Centerpoint option or one of the alternatives, we expect that it will take approximately nine to 12 months to complete the build-out and equipping of a commercial manufacturing facility and that such arrangements would likely involve material obligations. However, other than with respect to our lease with TKC or Centerpoint, we have not entered into any binding arrangement with any party with respect to the lease, build-out and equipping of a manufacturing facility. There can be no assurance that we will enter into arrangements on the terms previously available to us, on a timely basis or at all. If we are unable to enter into financing arrangements on the terms we anticipate, on a timely basis or at all, we may not be able to complete the planned leasing, build-out and equipping of a commercial facility, or may be delayed in doing so, which in either case would delay the commercialization of AGS-003.

 

We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development of our product candidates.

 

Our future capital requirements will depend on many factors, including:

 

the progress and results of our ADAPT trial of AGS-003 and the ongoing and planned investigator-initiated clinical trials of AGS-003 that we support;

 

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the progress and results of the ongoing investigator-initiated clinical trial of AGS-004 in combination with vorinostat for HIV eradication and the planned investigator-initiated clinical trials of AGS-004 that we support and our ability to obtain additional funding under our NIH and NIAID contract for our AGS-004 program;

  

the development, initiation and support of additional clinical trials of AGS-003 and AGS-004 in mRCC or other indications;

 

the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for our other product candidates;

 

the costs and timing of our leasing, build-out and equipping of a commercial manufacturing facility or of alternative arrangements for commercial manufacturing and any costs and liabilities associated with financing arrangements entered into to fund the costs of these activities;

 

the costs, timing and outcome of regulatory review of our product candidates;

 

the costs of commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive regulatory approval;

 

the potential need to repay the $6.0 million in principal remaining outstanding under the loan under our license agreement with Medinet Co. Ltd. and its wholly-owned subsidiary, MEDcell Co., Ltd, which we refer to together as Medinet;

 

our ability to refinance our existing venture loan facility with the Lenders ;

 

revenue, if any, received from commercial sales of our product candidates, should any of our product candidates be approved by the FDA or a similar regulatory authority outside the United States;

 

the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

 

the extent to which we acquire or invest in other businesses, products and technologies;

 

our ability to obtain government or other third party funding for the development of our product candidates; and

 

our ability to establish collaborations on favorable terms, if at all, particularly arrangements to develop, market and distribute AGS-003 outside North America and arrangements for the development and commercialization of our non-oncology product candidates, including AGS-004.

 

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, government contracts, government and other third party grants or other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, stockholder ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect stockholder rights. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

 

We are seeking government or other third party funding for the continued development of AGS-004. In January 2014, CARE agreed that it would fund all patient clinical costs of Stage 1 of our adult eradication clinical trial of AGS-004, except for the associated manufacturing costs for which we were responsible. NIAID’s Division of AIDS has approved $6.6 million in funding for Stage 2 of this Phase 2 clinical trial to be provided directly to the University of North Carolina. If we are unable to raise additional government or other third party funding when needed, we may be required to delay, limit, reduce or terminate our development of AGS-004 or to grant rights to develop and market AGS-004 that we would otherwise prefer to keep for ourselves.

 

Critical Accounting Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

 

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Our significant accounting policies are described in Note 1 of the notes to our financial statements in our Annual Report on Form 10-K for the year ended December 31, 2015. There have been no significant changes to our critical accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Contractual Obligations

 

During the three months ended September 30, 2016, there were no material changes outside the ordinary course of our business to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015, except for the new capital lease obligations discussed in Note 7 to our financial statements. In August 2016, we entered into two power generation agreements with an electric utility company. The power generation agreements are being accounted for as capital leases for financial reporting purposes.

 

Under the power generation agreements, the electric utility company will design, procure, install, own and maintain equipment at Centerpoint to support mission critical electrical loads. The power generation agreements require monthly payments totaling $41,185 for a period of 128 months, or a total of $5.3 million ending in March 2027. As of September 30, 2016, future minimum payments due under these capital leases within one-year total $0.5 million, within years one and three total $1.0 million, within years three and five total $1.0 million and thereafter totals $2.7 million. Property, plant and equipment includes $2.4 million under the power generation agreements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Our primary exposure to market risk is limited to our cash and cash equivalents, all of which have maturities of one year or less. The related interest income sensitivity is affected by changes in the general level of short-term U.S. interest rates. We primarily invest in high quality, short-term marketable debt securities issued by high quality financial and industrial companies.

 

Due to the short-term duration and low risk profile of our cash and cash equivalents, an immediate 10.0% change in interest rates would not have a material effect on the fair value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our cash and cash equivalents.

 

We do not believe that our cash and cash equivalents have significant risk of default or illiquidity. However, while we believe our cash and cash equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in fair value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits.

 

We are also exposed to market risk from the potential increase in short-term U.S. interest rates under our Loan Agreement with Horizon and Fortress. Pursuant to the Loan Agreement, the per annum interest rate for each tranche is a floating rate equal to 9.25% plus the amount by which the one-month LIBOR exceeds 0.50% (effectively a floating rate equal to 8.75% plus the one-month LIBOR Rate). The total per annum interest rate shall not exceed 10.75%. Since the one-month LIBOR Rate has been less than 0.50% since the Loan Agreement was executed in September 2014, our interest rate has been and is currently 9.25%. If the one-month LIBOR Rate increases to 2.0% or greater, the interest expense we will incur under the Loan Agreement will increase by $375,000 per year.

 

All of our other debt instruments and liabilities that incur interest charges do so at fixed rates. We incur interest expense at fixed rates under the unsecured promissory note payable to Medinet (3% per annum), the manufacturing research and development obligations payable to Invetech (7% per annum), and other notes payable (8.31% per annum).

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of September 30, 2016, the Company’s principal executive officer and principal financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance levels.

 

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Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we have been and may again become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any material litigation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Item 1A. Risk Factors

 

We operate in a dynamic and rapidly changing business environment that involves multiple risks and substantial uncertainty. The following discussion addresses risks and uncertainties that could cause, or contribute to causing, actual results to differ from expectations in material ways. In evaluating our business, investors should pay particular attention to the risks and uncertainties described below and in other sections of this Quarterly Report on Form 10-Q and in our subsequent filings with the SEC. These risks and uncertainties, or other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations, cash flows and financial condition. The trading price of our common stock could also decline due to any of these risks, and you could lose all or part of your investment.

 

Risks Related to the Development and Regulatory Approval of Our Product Candidates

 

We depend heavily on the success of our two product candidates, AGS-003 and AGS-004, both of which are still in clinical development. Clinical trials of our product candidates may not be successful. If we are unable to commercialize our product candidates or experience significant delays in doing so, our business will be materially harmed.

 

We currently have no products approved for sale. We have invested a significant portion of our efforts and financial resources in the development of AGS-003 for the treatment of metastatic renal cell carcinoma, or mRCC, and other cancers and AGS-004 for the treatment of HIV. Our ability to generate product revenues, which we do not expect will occur for at least the next several years, if ever, will depend heavily on the successful development and eventual commercialization of these product candidates. The success of these product candidates will depend on several factors, including the following:

 

successful completion of clinical trials, including clinical results that are statistically significant as well as clinically meaningful in the context of the indications for which we are developing our product candidates;

 

receipt of marketing approvals from the FDA and similar regulatory authorities outside the United States;

 

establishing commercial manufacturing capabilities through the lease, build-out and equipping of a facility or through arrangements with a contract manufacturing organization for the commercial manufacture of products based on our Arcelis platform;

 

maintaining patent and trade secret protection and regulatory exclusivity for our product candidates, both in the United States and internationally;

 

launching commercial sales of the products, if and when approved, whether alone or in collaboration with others;

 

commercial acceptance of our products, if and when approved, by patients, the medical community and third party payors;

 

obtaining and maintaining healthcare coverage and adequate reimbursement;

 

effectively competing with other therapies; and

 

a continued acceptable safety profile of the products following any marketing approval.

 

If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize our product candidates, which would materially harm our business.

 

If clinical trials of our product candidates, such as our ADAPT trial of AGS-003, fail to demonstrate safety and efficacy to the satisfaction of the FDA or similar regulatory authorities outside the United States or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.

 

Before obtaining regulatory approval for the sale of our product candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. For instance, despite observing positive results in earlier clinical trials of AGS-004, we failed to achieve the primary endpoint of our Phase 2b clinical trial of AGS-004. Similarly, recommendations of the independent data monitoring committee that the ADAPT trial should be continued based on results of the committee’s interim data analyses of interim trial results may not be indicative as to the final results of the trial. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products.

 

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In particular, to date, we have not completed a randomized clinical trial of AGS-003 against a placebo or a comparator therapy. While we believe comparisons to results from other reported clinical trials or from analyses of data from the International Metastatic Renal Cell Carcinoma Database Consortium, or the Consortium, can assist in evaluating the potential efficacy of our AGS-003 product candidate, there are many factors that affect the outcome for patients, some of which are not apparent in published reports. As a result, results from two different trials or between a trial and an analysis of a treatment database often cannot be reliably compared. Our ADAPT trial of AGS-003 is intended to compare directly the combination of AGS-003 and sunitinib or another targeted therapy to treatment with sunitinib or another targeted therapy monotherapy. Based on the design of the trial, the data from the trial will need to demonstrate an increase in median overall survival of approximately six months for the AGS-003 plus sunitinib / targeted therapy arm as compared to the sunitinib / targeted therapy monotherapy control arm in order to show statistical significance and achieve the primary endpoint of the trial. We will need to show this statistically significant benefit of the combined therapy as compared to treatment with the sunitinib / targeted therapy monotherapy as part of a biologics license application, or BLA, submission for approval of AGS-003. However, demonstration of statistical significance and achievement of the primary endpoint of the trial do not assure approval by the FDA or similar regulatory authorities outside the United States.

 

Patients in our ADAPT trial who receive treatment with sunitinib / targeted therapy monotherapy may not have results similar to patients studied in other clinical trials of sunitinib or to patients in the Consortium database who were treated with sunitinib or other targeted therapies. If the patients in our ADAPT trial who receive sunitinib / targeted therapy alone have results which are better than the results that occurred in those other clinical trials or the results described in the Consortium database, we may not demonstrate a sufficient clinical benefit from AGS-003 in combination with sunitinib and other targeted therapies to allow the FDA to approve AGS-003 for marketing. In addition, only 21 evaluable patients received the combination of AGS-003 and sunitinib in our single arm Phase 2 clinical trial. If the patients in our ADAPT trial who receive the combination of AGS-003 and sunitinib / targeted therapy have results which are worse than the results that occurred in our Phase 2 clinical trial, we may not demonstrate a sufficient benefit from the combination therapy to allow the FDA to approve AGS-003 for marketing.

 

For drug and biological products, the FDA typically requires the successful completion of two adequate and well-controlled clinical trials to support marketing approval because a conclusion based on two such trials will be more reliable than a conclusion based on a single trial. In the case of AGS-003, which is intended for a life-threatening disease, we intend to seek approval based upon the results of a single pivotal Phase 3 clinical trial, our ADAPT trial. The FDA reviewed our plans to conduct our ADAPT trial under its special protocol assessment, or SPA, process. In February 2013, the FDA advised us in a letter that it had completed its review of our plans under the SPA process. The FDA also informed us that in order for a single trial to support approval of an indication, the trial must be well conducted, and the results of the trial must be internally consistent, clinically meaningful and statistically very persuasive. If the results for the primary endpoint are not robust, are subject to confounding factors, or are not adequately supported by other trial endpoints, the FDA may refuse to approve our BLA based upon a single clinical trial. In addition, because only 21 evaluable patients received the combination of AGS-003 and sunitinib in our Phase 2 clinical trial, and as a result, we did not have enough evaluable patients to perform the statistical analysis to determine whether the primary endpoint of complete response rate was achieved in that trial, we expect that the data from our Phase 2 clinical trial will have only a limited impact on the FDA’s ultimate assessment of efficacy of AGS-003. Thus, there can be no guarantee that the FDA will not require additional pivotal clinical trials as a condition for approving AGS-003 or as a post-approval requirement.

 

If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:

 

be delayed in obtaining marketing approval for our product candidates;

 

not obtain marketing approval at all;

 

obtain approval for indications or patient populations that are not as broad as intended or desired;

 

obtain approval with labeling that includes significant use restrictions or safety warnings, including boxed warnings;

 

be subject to additional post-marketing testing requirements;

 

be subject to restrictions on how the product is distributed or used; or

 

have the product removed from the market after obtaining marketing approval.

 

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If we experience any of a number of possible unforeseen events in connection with our clinical trials, potential marketing or commercialization of our product candidates could be delayed or prevented.

 

We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates. For example, in September 2011, the FDA placed the original protocol for our ADAPT trial of AGS-003 in combination with sunitinib on partial clinical hold due to unresolved questions regarding the planned measurement of the secretion of the cytokine interleukin-12, or IL-12, as part of the specifications for the release of AGS-003. We subsequently reached an agreement with the FDA regarding the IL-12 release specifications and the FDA lifted the partial clinical hold.

 

Unforeseen events that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates include:

 

regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

we may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

 

clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;

 

the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate; for example, in our Phase 2b clinical trial of AGS-004, we experienced a higher dropout rate than we anticipated due to the higher than expected number of patients who did not complete the full 12 week antiretroviral treatment interruption required by the protocol for the trial;

 

our third party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

we may decide, or regulators or institutional review boards may require us or our investigators to, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;

 

the cost of clinical trials of our product candidates may be greater than we anticipate; and

 

the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate.

 

In addition, the patients recruited for clinical trials of our product candidates may have a disease profile or other characteristics that are different than we expect and different than the clinical trials were designed for, which could adversely impact the results of the clinical trials. For instance, our Phase 2 combination therapy clinical trial of AGS-003 in combination with sunitinib was originally designed to enroll patients with favorable disease risk profiles and intermediate disease risk profiles and with a primary endpoint of complete response rate. However, the actual trial population consisted entirely of patients with intermediate disease risk profiles and poor disease risk profiles. This is a population for which published research has shown that sunitinib alone, as well as other of the targeted therapies for mRCC, rarely if ever produce complete responses in mRCC, and in our Phase 2 clinical trial in this population, the combination therapy of AGS-003 and sunitinib did not show a complete response rate that met the endpoint of the trial.

 

Our product development costs will also increase if we experience delays in testing or obtaining marketing approvals. We do not know whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. For example, in response to our submission of an investigational new drug application, or IND, for AGS-004, the FDA raised safety concerns regarding the analytical treatment interruption contemplated by our protocol for our Phase 2 clinical trial of AGS-004, and required a one-year safety follow-up after the final dose for each patient. This resulted in the need for an amendment to the trial protocol and a four-month delay prior to initiating the Phase 2 clinical trial in the United States. In addition to additional costs, significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do and impair our ability to commercialize our product candidates and may harm our business and results of operations.

 

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The FDA has reviewed the protocol for our ADAPT trial of AGS-003 in combination with sunitinib / targeted therapy under the SPA process. However, agreement by the FDA with the protocol under the SPA process does not guarantee that the trial will be successful or that, if successful, AGS-003 will receive marketing approval.

 

The FDA has reviewed, under the SPA process, the protocol for our ADAPT trial of AGS-003 in combination with sunitinib / targeted therapy. The SPA process is designed to facilitate the FDA’s review and approval of drug and biological products by allowing the FDA to evaluate the proposed design and size of Phase 3 clinical trials that are intended to form the primary basis for determining a drug candidate’s efficacy. In February 2012, we received a letter from the FDA advising us that the FDA had completed its review of our protocol for the ADAPT trial under the SPA process. In the letter, the FDA stated that it had determined that the protocol sufficiently addressed the trial’s objectives and that the trial was adequately designed to provide the necessary data to support a submission for marketing approval.

 

An SPA does not guarantee that AGS-003 will receive marketing approval. The FDA may raise issues related to safety, trial conduct, bias, deviation from the protocol, statistical power, patient completion rates, changes in scientific or medical parameters or internal inconsistencies in the data prior to making its final decision. The FDA may also seek the guidance of an outside advisory committee prior to making its final decision. In addition, the combination of AGS-003 and sunitinib may not achieve the primary endpoint of the trial. Even if the primary endpoint in our ADAPT trial is achieved, AGS-003 may not be approved. Many companies which have been granted SPAs have ultimately failed to obtain final approval to market their products.

 

In its February 2012 letter, the FDA informed us that in order for a single trial to support approval of an indication, the trial must be well conducted, and the results of the trial must be internally consistent, clinically meaningful and statistically very persuasive. If the results for the primary endpoint are not robust, are subject to confounding factors, or are not adequately supported by other trial endpoints, the FDA may refuse to approve our BLA based upon a single clinical trial. There can be no guarantee that the FDA will not require additional pivotal clinical trials before, or as a condition for, approving AGS-003.

 

If we experience delays or difficulties in the enrollment of patients in our clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.

 

We may not be able to initiate or continue clinical trials for our product candidates if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authorities outside the United States. Our competitors may have ongoing clinical trials for product candidates that could be competitive with our product candidates, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our competitors’ product candidates. For example, during the Phase 1/2 monotherapy clinical trial of AGS-003 that we conducted, our ability to enroll patients in the trial was adversely affected by the FDA’s approval of sorafenib and sunitinib, because patients did not want to receive, and physicians were reluctant to administer, AGS-003 as an experimental monotherapy once new therapies that showed efficacy in clinical trials were introduced to the market and became widely available.

 

Patient enrollment is affected by other factors including:

 

severity of the disease under investigation;

 

eligibility criteria for the trial in question;

 

perceived risks and benefits of the product candidate under study;

 

efforts to facilitate timely enrollment in clinical trials;

 

patient referral practices of physicians;

 

the ability to monitor patients adequately during and after treatment; and

 

proximity and availability of clinical trial sites for prospective patients.

 

The actual amount of time for full enrollment of our clinical trials could be longer than planned. Enrollment delays in any of our clinical trials may result in increased development costs for our product candidates, which would cause the value of the company to decline and limit our ability to obtain additional financing. Our inability to enroll a sufficient number of patients for any of our other clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether.

 

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We are developing AGS-004 for use in combination with latency reversing drugs to eradicate HIV. If latency reversing drugs are not successfully developed for HIV on a timely basis or at all, we will be unable to develop AGS-004 for this use or will be delayed in doing so. In addition, because there are currently no products approved for HIV eradication, we cannot be certain of the clinical trials that we will need to conduct or the regulatory requirements that we will need to satisfy in order to obtain marketing approval of AGS-004 for this purpose.

 

We are focusing our development program for AGS-004 on the use of AGS-004 in combination with latency reversing drugs, including Vorinostat, to eradicate HIV. We plan to rely on these latency reversing drugs because we recognize that the ultimate objective of virus eradication is unlikely to be achieved with immunotherapy alone because the immune system is not able to recognize the HIV virus in latently infected cells with a low level or lack of expression of HIV antigens.

 

Several companies and academic groups are evaluating latency reversing drugs that can potentially activate latently infected cells to increase viral antigen expression and make the cells vulnerable to elimination by the immune system. We are not a party to any arrangements with these companies or academic groups. If these companies or academic groups determine not to develop latency reversing drugs for this purpose because the drugs do not sufficiently increase viral antigen expression or have unacceptable toxicities, or these companies or academic groups otherwise determine to collaborate with other developers of immunotherapies on a combination therapy for complete virus eradication, we will not be able to complete our AGS-004 development program. In addition, if these companies or academic groups do not proceed with such development on a timely basis, our AGS-004 program correspondingly would be delayed.

 

A number of the latency reversing drugs being evaluated for use in HIV patients are currently approved in the United States and elsewhere for use in the treatment of specified cancer indications. For instance Vorinostat is approved for cutaneous T-cell lymphoma. If these drugs are not approved by the FDA or equivalent foreign regulatory authorities for use in HIV, the FDA and these other regulatory authorities may not approve AGS-004 without the latency reversing drug having received marketing approval for HIV. If the FDA and these other regulatory authorities approve AGS-004 without the approval of the latency reversing drug for HIV, the use of AGS-004 in combination with the latency reversing drug for virus eradication would require sales of the latency reversing drug for off-label use. In such event, the success of the combination of AGS-004 and the latency reversing drug would be subject to the willingness of physicians, patients, healthcare payors and others in the medical community to use the latency reversing drug for off-label use and of government authorities and third party payors to pay for the combination therapy. In addition, we would be limited in our ability to market the combination for its intended use if the latency reversing drug were to be used off-label.

 

Currently, there are no products approved for the eradication of HIV. As a result, we cannot be certain as to the clinical trials we will need to conduct or the regulatory requirements that we will need to satisfy in order to obtain marketing approval of AGS-004 for the eradication of HIV.

 

If serious adverse or inappropriate side effects are identified during the development of our product candidates, we may need to abandon or limit our development of some of our product candidates.

 

All of our product candidates are still in preclinical or clinical development and their risk of failure is high. It is impossible to predict when or if any of our product candidates will prove effective or safe in humans or will receive regulatory approval. If our product candidates are associated with undesirable side effects or have characteristics that are unexpected, we may need to abandon their development or limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. In addition, such effects or characteristics could cause an institutional review board or regulatory authorities to interrupt, delay or halt clinical trials of one or more of our product candidates, require us to conduct additional clinical trials or other tests or studies, and could result in a more restrictive label, or the delay or denial of marketing approval by the FDA or comparable foreign regulatory authorities.

 

Our Arcelis-based product candidates are immunotherapies that are based on a novel technology utilizing a patient’s own tissue. This may raise development issues that we may not have anticipated or be able to resolve, regulatory issues that could delay or prevent approval or personnel issues that may prevent us from further developing and commercializing our product candidates.

 

AGS-003 and AGS-004 are based on our novel Arcelis technology platform. In the course of developing this platform and these product candidates, we have encountered difficulties in the development process. For example, we terminated the development of MB-002, the predecessor to AGS-003, when the results from the initial clinical trial of MB-002 indicated that the product candidate only corrected defects in the production of one of two critical cytokines required for effective immune response. There can be no assurance that additional development problems will not arise in the future which we may not have anticipated or be able to resolve or which may cause significant delays in development.

 

In addition, regulatory approval of novel product candidates such as our Arcelis-based product candidates manufactured using novel manufacturing processes such as ours can be more expensive and take longer than for other, more well-known or extensively studied pharmaceutical or biopharmaceutical products, due to our and regulatory agencies’ lack of experience with them. The FDA has only approved one individualized immunotherapy product to date. This lack of experience may lengthen the regulatory review process, require us to conduct additional studies or clinical trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of these product candidates or lead to significant post-approval limitations or restrictions.

 

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The novel nature of our product candidates also means that fewer people are trained in or experienced with product candidates of this type, which may make it difficult to find, hire and retain capable personnel for research, development and manufacturing positions.

 

Development of our individualized Arcelis-based product candidates is subject to significant uncertainty because each product candidate is derived from source material that is inherently variable. This variability could reduce the effectiveness of our Arcelis-based product candidates, delay any FDA approval of our Arcelis-based product candidates, cause us to change our manufacturing methods and adversely affect the commercial success of any approved Arcelis-based products.

 

The disease samples from the patients to be treated with our Arcelis-based products vary from patient to patient. This inherent variability may adversely affect our ability to manufacture our products because each tumor or virus sample that we receive and process will yield a different product. As a result, we may not be able to consistently produce a product for every patient and we may not be able to treat all patients effectively. Such inconsistency could delay FDA or other regulatory approval of our Arcelis-based product candidates or, if approved, adversely affect market acceptance and use of our Arcelis-based products. If we have to change our manufacturing methods to address any inconsistency, we may have to perform additional clinical trials, which would delay FDA or other regulatory approval of our Arcelis-based product candidates and increase the costs of development of our Arcelis-based product candidates.

 

The inherent variability of the disease samples from the patients to be treated with our Arcelis-based products may further adversely affect our ability to manufacture our products because variability in the source material for our product candidates, such as tumor cells or viruses, may cause variability in the composition of other cells in our product candidates. Such variability in composition or purity could adversely affect our ability to establish acceptable release specifications and the development and regulatory approval processes for our product candidates may be delayed, which would increase the costs of development of our Arcelis-based product candidates.

 

If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize our product candidates, and our ability to generate revenue will be materially impaired.

 

Failure to obtain regulatory approval for either of our product candidates will prevent us from commercializing the product candidate. We have not received regulatory approval to market any of our product candidates in any jurisdiction. We have only limited experience in filing and supporting the applications necessary to gain regulatory approvals and expect to rely on third party contract research organizations to assist us in this process. Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing FDA approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the FDA. Our product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.

 

The process of obtaining regulatory approvals, both in the United States and abroad, is expensive, may take many years if additional clinical trials are required, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. To date, the FDA has only approved one individualized immunotherapy product. Changes in clinical guidelines or regulatory approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

 

If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial prospects for our product candidates may be harmed and our ability to generate revenues will be materially impaired.

 

Failure to obtain regulatory approval in international jurisdictions would prevent our product candidates from being marketed abroad.

 

We are a party to arrangements with third parties, and intend to enter into additional arrangements with third parties, under which they would market our products outside the United States. In order to market and sell our products in the European Union and many other jurisdictions, we or such third parties must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We or these third parties may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.

 

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A fast track designation by the FDA may not actually lead to a faster development, regulatory review or approval process.

 

If a product is intended for the treatment of a serious or life-threatening condition and the product demonstrates the potential to address an unmet need for this condition, the treatment sponsor may apply for FDA fast track designation. In April 2012, the FDA notified us that we obtained fast track designation for AGS-003 for the treatment of mRCC. Fast track designation does not ensure that we will experience a faster development, regulatory review or approval process compared to conventional FDA procedures. Additionally, the FDA may withdraw fast track designation if it believes that the designation is no longer supported by data from our clinical development program.

 

Risks Related to Our Financial Position and Need for Additional Capital

 

We have incurred significant losses since our inception. We expect to incur losses for at least the next several years and may never achieve or maintain profitability.

 

Since inception, we have incurred significant operating losses. Our net loss was $53.3 million for the year ended December 31, 2014, $74.8 million for the year ended December 31, 2015 and $37.7 million for the nine months ended September 30, 2016. As of September 30, 2016, we had an accumulated deficit of $316.6 million. To date, we have financed our operations primarily through public offerings of common stock and warrants, private placements of common stock, preferred stock and warrants, convertible debt financings, debt from financial institutions, government contracts, government and other third party grants and license and collaboration agreements. We have devoted substantially all of our efforts to research and development, including clinical trials. We have not completed development of any product candidates. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially if and as we:

 

continue our ADAPT trial of AGS-003 for the treatment of mRCC;

 

continue to support ongoing investigator-initiated clinical trials of AGS-003 and AGS-004;

 

support planned investigator-initiated clinical trials of AGS-003 and AGS-004;

 

initiate and conduct additional trials of AGS-003 and AGS-004 for the treatment of cancers and HIV;

 

seek regulatory approvals for our product candidates that successfully complete clinical trials;

 

lease, build out and equip a facility or enter into arrangements with a contract manufacturing organization for the commercial manufacture of products based on our Arcelis platform;

 

establish a sales, marketing and distribution infrastructure to commercialize products for which we may obtain regulatory approval;

 

maintain, expand and protect our intellectual property portfolio;

 

continue our other research and development efforts;

 

hire additional clinical, quality control, scientific and management personnel; and

 

add operational, financial and management information systems and personnel, including personnel to support our product development and planned commercialization efforts.

 

To become and remain profitable, we must develop and eventually commercialize a product or products with significant market potential. This development and commercialization will require us to be successful in a range of challenging activities, including successfully completing preclinical testing and clinical trials of our product candidates, obtaining regulatory approval for these product candidates, building out and equipping a commercial manufacturing facility or entering into arrangements with a contract manufacturing organization and manufacturing, marketing and selling those products for which we may obtain regulatory approval. We are only in the preliminary stages of some of these activities. We may never succeed in these activities and may never generate revenues that are significant or large enough to achieve profitability.

 

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Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of the company and could impair our ability to raise capital, expand our business, maintain our research and development efforts or continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.

 

We will need substantial additional funding. If we are unable to raise capital when needed, we would be forced to delay, reduce, terminate or eliminate our product development programs, including plans to lease, build out and equip a commercial manufacturing facility or our commercialization efforts and to take other actions to reduce our operating expenses.

 

We have no external sources of funds other than our contract with the NIH and NIAID for the development of AGS-004, and we expect our expenses to increase in connection with our ongoing activities, particularly as we continue our ADAPT trial of AGS-003 for the treatment of mRCC, continue to support ongoing investigator-initiated clinical trials of AGS-003 and AGS-004, support planned investigator-initiated clinical trials of AGS-003 and AGS-004, initiate and conduct additional clinical trials of AGS-003 and AGS-004 for the treatment of cancers and HIV, seek regulatory approval for our product candidates and lease, build out and equip a commercial manufacturing facility or otherwise arrange for the commercial manufacture of our products. In addition, if we obtain regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. Furthermore, we expect to continue to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce, terminate or eliminate our product development programs, our plans to lease, build out and equip a commercial manufacturing facility or our commercialization efforts and to take other actions to reduce our operating expenses.

 

As of September 30, 2016, we had cash and cash equivalents of $69.3 million and working capital of $47.3 million. Based on our current operating plan, we expect that our cash and cash equivalents as of September 30, 2016, together with the anticipated funding under our contract with the NIH, and the NIAID will enable us to fund our operating expenses through the second quarter of 2017. We expect that these funds will be sufficient to fund our operations until such time as there are a sufficient number of events to permit the primary analysis and assessment of overall survival in the ADAPT trial and to fund our share of the expected costs related to preparations for commercial manufacturing. We expect that these funds will not, however, be sufficient to enable us to complete required activities in preparation for the submission of a BLA to the FDA for AGS-003, to commercially launch AGS-003 or to complete the build-out and equipping of a commercial manufacturing facility without entering into financing arrangements related to the facility. These expectations are based on our current operating plan under which we implemented measures to reduce our operating expenses, including, among other measures, reductions in spending for activities in preparation for submission of a BLA and a workforce reduction action plan designed to streamline operations and reduce our operating expenses. We intend to seek to enter into collaborations for the development, marketing and distribution of AGS-003 outside North America and of our non-oncology product candidates, including AGS-004. If we are unable to enter into any such collaborations, we may be required to implement additional measures to materially reduce our operating expenses, which could adversely affect our business and operations. It is also possible that our available funds will not enable us to reach a sufficient number of events to permit the primary analysis and assessment of overall survival in the ADAPT trial because the actual costs and timing of clinical trials are difficult to predict and are subject to substantial risks and delays.

 

We will also need to obtain significant financing to lease, build out and equip a commercial manufacturing facility. We continue to explore financing arrangements in connection with the Centerpoint facility. We are also exploring other alternatives for the commercial supply of our products. These alternatives include both internal manufacturing solutions as well as potential contractual arrangements with contract manufacturing organizations. We expect that we will enter into arrangements for the commercial manufacture of our products during the fourth quarter of 2016. Under either the Centerpoint option or one of the alternatives, we expect that it will take approximately nine to 12 months to complete the build-out and equipping of a commercial manufacturing facility and that such arrangements would likely involve material obligations. However, other than with respect to our lease with TKC for Centerpoint, we have not entered into any binding arrangement with any party with respect to the lease, build-out and equipping of a manufacturing facility or other arrangements for commercial manufacturing . If we are unable to enter into such arrangements on the terms we anticipate, on a timely basis or at all, we may not be able to complete the planned leasing, build-out and equipping of a commercial facility or otherwise arrange for the commercial manufacture of our products, or may be delayed in doing so, which in either case would delay the commercialization of AGS-003. 

 

Our future capital requirements will depend on many factors, including:

 

the progress and results of our ADAPT trial and the ongoing and planned investigator-initiated clinical trials of AGS-003 that we support;

 

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the progress and results of the ongoing investigator-initiated clinical trial of AGS-004 in combination with vorinostat for HIV eradication and the planned investigator-initiated clinical trial of AGS-004 that we support and our ability to obtain additional funding under our NIH and NIAID contract for our AGS-004 program;

 

the development, initiation and support of additional clinical trials of AGS-003 and AGS-004 in mRCC or other indications;

 

the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for our other product candidates;

 

the costs and timing of our lease, build-out and equipping of a commercial manufacturing facility or of alternative arrangements for commercial manufacturing and any costs and liabilities associated with financing arrangements entered into to fund the costs of these activities;

 

the costs, timing and outcome of regulatory submissions and review of our product candidates;

 

the costs of commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive regulatory approval;

 

the potential need to repay the $6.0 million remaining outstanding under the loan under our license agreement with Medinet Co. Ltd. and its wholly-owned subsidiary, MEDcell Co., Ltd, which we refer to together as Medinet;

 

our ability to refinance our existing venture loan facility with the Lenders;

 

revenue, if any, received from commercial sales of our product candidates, should any of our product candidates be approved by the FDA or a similar regulatory authority outside the United States;

 

the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

 

the extent to which we acquire or invest in other businesses, products and technologies;

 

our ability to obtain government or other third party funding for the development of our product candidates; and

 

our ability to establish collaborations on favorable terms, if at all, particularly arrangements to develop, market and distribute AGS-003 outside North America and arrangements for the development and commercialization of our non-oncology product candidates, including AGS-004.

 

Conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for several years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Additional financing may not be available to us on acceptable terms, or at all.

 

Our independent registered public accounting firm included an explanatory paragraph relating to our ability to continue as a going concern in its report on our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Our report from our independent registered public accounting firm for the year ended December 31, 2015 includes an explanatory paragraph stating that our losses from operations and required additional funding to finance our operations raise substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our audited financial statements, and it is likely that investors will lose all or a part of their investment. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms or at all.

 

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Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

 

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, government contracts, government and other third party grants or other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. We will require substantial funding to complete the planned lease, build-out and equipping of a facility for the commercial manufacture of products based on our Arcelis platform, complete required activities in preparation for the submission of a BLA for AGS-003, fund our commercialization efforts and fund our other operating expenses and other activities. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. For example, in 2016 we have issued and sold securities under the private placement financing, the sales agreement with Cowen & Company, LLC and the August 2016 public follow-on offering, each of which resulted in dilution to our existing stockholders.

 

Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

 

We currently intend to collaborate with third parties for the manufacturing, development or commercialization of AGS-003 outside of North America. We plan to seek government or other third party funding for the continued development of AGS-004 and to collaborate with third parties for the development and commercialization of AGS-004. If we raise additional funds through government or other third party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If the loan from Medinet becomes due and we do not repay it, we have agreed to grant Medinet a non-exclusive, royalty-bearing license to make and sell Arcelis products in Japan for the treatment of cancer.

 

Our ability to use our net operating loss carry-forwards and tax credit carryforwards may be limited.

 

The utilization of the net operating loss and tax credit carryforwards may be subject to limitation under the rules regarding a change in stock ownership as determined by the Internal Revenue Code, and state and foreign tax laws. Section 382 of the Internal Revenue Code of 1986, as amended, imposes annual limitations on the utilization of net operating loss carryforwards, other tax carryforwards, and certain built-in losses upon an ownership change as defined under that section. In general terms, an ownership change may result from transactions that increase the aggregate ownership of certain of our stockholders by more than 50 percentage points over a three year testing period. If we have undergone a Section 382 ownership change, an annual limitation would be imposed on certain of our tax attributes, including NOL and capital loss carryforwards, and certain other losses, credits, deductions or tax basis. As of September 30, 2016, we have not completed a formal study to determine whether there are 382 limitations that apply. However, we believe that, by engaging in the financing transactions in which we have engaged, we may have triggered an “ownership change” limitation. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carry-forwards and other tax credit carryforwards to offset U.S. federal taxable income may be subject to limitations, which potentially could result in increased future tax liability to us.

 

Risk Related to the Commercialization of our Product Candidates

 

We have no history of commercializing pharmaceutical products, which may make it difficult to evaluate the prospects for our future viability.

 

Our operations to date have been limited to financing and staffing our company, developing our technology and product candidates and establishing collaborations. We have not yet demonstrated an ability to successfully complete a pivotal clinical trial, compile an acceptable regulatory submission for product approval, obtain marketing approvals, manufacture a commercial scale product or conduct sales and marketing activities necessary for successful product commercialization. Consequently, predictions about our future success or viability may not be as accurate as they could be if we had a history of successfully developing and commercializing pharmaceutical products.

 

In addition, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition at some point from a company with research and development focus to a company capable of supporting commercial activities. We may not be successful in such a transition.

 

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Even if AGS-003 or AGS-004 receives regulatory approval, it may fail to achieve the degree of market acceptance by physicians, patients, healthcare payors and others in the medical community necessary for commercial success.

 

We have never commercialized a product candidate. Even if AGS-003 or AGS-004 receives marketing approval, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, healthcare payors and others in the medical community. Gaining market acceptance for our Arcelis-based products may be particularly difficult as, to date, the FDA has only approved one individualized immunotherapy and our Arcelis-based products are based on a novel technology. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

efficacy and potential advantages compared to alternative treatments;

 

the ability to offer our product candidates for sale at competitive prices;

 

convenience and ease of administration compared to alternative treatments;

 

the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

the strength of sales, marketing and distribution support;

 

the approval of other new products for the same indications;
   
the ability of our product to be combined with emerging standards of care;

 

availability and amount of reimbursement from government payors, managed care plans and other third party payors;

 

adverse publicity about the product or favorable publicity about competitive products;

 

clinical indications for which the product is approved; and

 

the prevalence and severity of any side effects.

 

If any of our product candidates receives marketing approval and we, or others, later discover that the product is less effective than previously believed or causes undesirable side effects that were not previously identified, our ability to market the product could be compromised.

 

Clinical trials of our product candidates are conducted in carefully defined subsets of patients who have agreed to enter into clinical trials. Consequently, it is possible that our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any, in a broader patient population or alternatively fail to identify undesirable side effects. If, following approval of a product candidate, we, or others, discover that the product is less effective than previously believed or causes undesirable side effects that were not previously identified, any of the following adverse events could occur:

 

regulatory authorities may withdraw their approval of the product or seize the product;

 

we may be required to recall the product or change the way the product is administered;

 

additional restrictions may be imposed on the marketing of, or the manufacturing processes for, the particular product;

 

regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;

 

we may be required to create a Medication Guide outlining the risks of the previously unidentified side effects for distribution to patients;

 

additional restrictions may be imposed on the distribution or use of the product via a risk evaluation and mitigation strategy, or REMS;

 

we could be sued and held liable for harm caused to patients;

 

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the product may become less competitive; and

 

our reputation may suffer.

 

Any of these events could have a material and adverse effect on our operations and business and could adversely impact our stock price.

 

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market our product candidates, we may not be successful in commercializing our product candidates if and when they are approved.

 

We have only limited commercial capabilities and have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties. We plan to market and sell AGS-003 in North America independently and to enter into collaborations or other arrangements with third parties for the distribution or marketing of AGS-003 in the rest of the world. We plan to enter into collaborations or other arrangements with third parties for the distribution or marketing of AGS-004 and any of our other product candidates should such candidates receive marketing approval.

 

There are risks involved with both establishing our own sales and marketing capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

 

Factors that may inhibit our efforts to commercialize our products on our own include:

 

our inability to recruit and retain adequate numbers of effective sales and marketing personnel;

 

the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any future products;

 

the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines;

 

unforeseen costs and expenses associated with creating an independent sales and marketing organization; and

 

inability to establish customer service and access services, including potential supply chain and specialty pharmacy arrangements.

 

If we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues to us are likely to be lower than if we were to market and sell any products that we develop ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell and market our product candidates or doing so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.

 

We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do.

 

The development and commercialization of new drug products is highly competitive. We face competition with respect to our current product candidates, and will face competition with respect to any products that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of products for the treatment of the disease indications for which we are developing our product candidates. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.

 

Some of these competitive products and therapies are based on scientific approaches that are the same as or similar to our approach, and others are based on entirely different approaches. Many marketed therapies for the indications that we are currently pursuing, or indications that we may in the future seek to address using our Arcelis platform, are widely accepted by physicians, patients and payors, which may make it difficult for us to replace them with any products that we successfully develop and are permitted to market.

 

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The FDA has approved several targeted therapies as monotherapies for mRCC, including Nexavar (sorafenib), marketed by Bayer Healthcare Pharmaceuticals, Inc. and Onyx Pharmaceuticals, Inc.; Sutent (sunitinib) and Inlyta (axitinib), marketed by Pfizer, Inc.; Avastin (bevacizumab), marketed by Genentech, Inc., a member of the Roche Group; Votrient (pazopanib) and Afinitor (everolimus), marketed by Novartis Pharmaceuticals Corporation; Torisel (temsirolimus), marketed by Pfizer and most recently, Opdivo (nivolumab), marketed by Bristol-Myers Squibb and Cabometyx (cabozantinib), marketed by Exelixis, for second-line mRCC. In addition, we estimate that there are numerous therapies for mRCC in clinical development by many public and private biotechnology and pharmaceutical companies targeting numerous different cancer types and stages. A number of these are in late stage development including Opdivo (nivolumab) plus Yervoy (ipilimumab) in combination for first-line mRCC, which are currently being compared in a Phase 3 trial to sunitinib. In addition, if a standalone therapy for mRCC were developed that demonstrated improved efficacy over currently marketed first-line therapies with a favorable safety profile and without the need for combination therapy, such a therapy might pose a significant competitive threat to AGS-003.

 

We are currently conducting our ADAPT trial of AGS-003 plus sunitinib / targeted therapy. We elected to study AGS-003 in clinical trials in combination with sunitinib due in part to sunitinib being the current standard-of-care for first-line treatment of mRCC. Although we do not expect to seek FDA approval of AGS-003 solely in combination with sunitinib and have provided that, under the protocol for the ADAPT trial, investigators may discontinue sunitinib due to disease progression or toxicity and initiate second-line treatment with other approved compatible therapies, if we obtain approval by the FDA, such FDA approval may be limited to the combination of AGS-003 and sunitinib. In such event, the commercial success of AGS-003 would be linked to the commercial success of sunitinib. As a result, if sunitinib ceases to be the standard-of-care for first-line treatment of mRCC or another event occurs that adversely affects sales of sunitinib, the commercial success of AGS-003 may be adversely affected.

 

There are also numerous FDA-approved treatments for HIV, primarily antiretroviral therapies marketed by large pharmaceutical companies. Generic competition has developed in this market as patent exclusivity periods for older drugs have expired, with more than 15 generic drugs currently on the market. The presence of these generic drugs is resulting in price pressure in the HIV therapeutics market and could affect the pricing of AGS-004. Currently, there are no approved therapies for the eradication of HIV. We expect that major pharmaceutical companies that currently market antiretroviral therapy products or other companies that are developing HIV product candidates may seek to develop products for the eradication of HIV.

 

Our competitors may develop products that are more effective, safer, more convenient or less costly than any that we are developing or that would render our product candidates obsolete or non-competitive. Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours.

 

Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical, biotechnology and device industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and other early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

 

Even if we are able to commercialize any product candidates, the products may become subject to unfavorable pricing regulations, third party reimbursement practices or healthcare reform initiatives, which would harm our business.

 

The regulations that govern marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. In the United States, recently passed legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain regulatory approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates, even if our product candidates obtain regulatory approval.

 

Our ability to commercialize any products successfully also will depend in part on the extent to which reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and third party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that reimbursement will be available for any product that we commercialize and, if reimbursement is available, the level of reimbursement. Reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval. Obtaining reimbursement for our products may be particularly difficult because of the higher prices often associated with drugs administered under the supervision of a physician. If reimbursement is not available or is available only to limited levels, we may not be able to successfully commercialize any product candidate for which we obtain marketing approval.

 

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There may be significant delays in obtaining reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or similar regulatory authorities outside the United States. Moreover, eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs, and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Third party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our inability to promptly obtain coverage and profitable payment rates from both government-funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

 

Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.

 

We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. These risks may be even greater with respect to our Arcelis-based products which are manufactured using a novel technology. None of our product candidates has been widely used over an extended period of time, and therefore our safety data are limited. We derive the raw materials for manufacturing of our Arcelis-based product candidates from human cell sources, and therefore the manufacturing process and handling requirements are extensive and stringent, which increases the risk of quality failures and subsequent product liability claims.

 

If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

decreased demand for any product candidates or products that we may develop;

 

injury to our reputation and significant negative media attention;

 

withdrawal of clinical trial participants;

 

significant costs to defend the related litigation;

 

substantial monetary awards to trial participants or patients;

 

loss of revenue; and

 

the inability to commercialize any products that we may develop.

 

We currently hold $10.0 million in product liability insurance coverage, which may not be adequate to cover all liabilities that we may incur. We will need to increase our insurance coverage when we begin commercializing our product candidates, if ever. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

 

We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

 

Because we have limited financial and managerial resources, we focus on research programs and product candidates for specific indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable products.

 

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We have based our research and development efforts on our Arcelis platform. Notwithstanding our large investment to date and anticipated future expenditures in our Arcelis platform, we have not yet developed, and may never successfully develop, any marketed drugs using this approach. As a result of pursuing the development of product candidates using our Arcelis platform, we may fail to develop product candidates or address indications based on other scientific approaches that may offer greater commercial potential or for which there is a greater likelihood of success.

 

Our long-term business plan is to develop Arcelis-based products for the treatment of various cancers and infectious diseases. We may not be successful in our efforts to identify or discover additional product candidates that may be manufactured using our Arcelis platform. Research programs to identify new product candidates require substantial technical, financial and human resources. These research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development.

 

If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.

 

Risks Related to Our Dependence on Third Parties

 

Our reliance on government funding adds uncertainty to our research and commercialization efforts and may impose requirements that increase the costs of commercialization and production of our government-funded product candidates.

 

Our current development of AGS-004 for HIV is primarily funded by the NIH. We are dependent upon further government funding for continued development of AGS-004. However, increased pressure on governmental budgets may reduce the availability of government funding for programs such as AGS-004. In addition, contracts and grants from the U.S. government and its agencies include provisions that give the government substantial rights and remedies, many of which are not typically found in commercial contracts, including provisions that allow the government to:

 

terminate agreements, in whole or in part, for any reason or no reason;

 

reduce or modify the government’s obligations under such agreements without the consent of the other party;

 

claim rights, including intellectual property rights, in products and data developed under such agreements;

 

impose U.S. manufacturing requirements for products that embody inventions conceived or first reduced to practice under such agreements;

 

suspend or debar the contractor or grantee from doing future business with the government or a specific government agency;

 

pursue criminal or civil remedies under the False Claims Act, False Statements Act and similar remedy provisions specific to government agreements; and

 

limit the government’s financial liability to amounts appropriated by the U.S. Congress on a fiscal-year basis, thereby leaving some uncertainty about the future availability of funding for a program even after it has been funded for an initial period.

 

Government agreements normally contain additional terms and conditions that may increase our costs of doing business, reduce our profits, and expose us to liability for failure to comply with these terms and conditions. These include, for example:

 

specialized accounting systems unique to government contracts and grants;

 

mandatory financial audits and potential liability for price adjustments or recoupment of government funds after such funds have been spent;

 

public disclosures of certain contract and grant information, which may enable competitors to gain insights into our research program; and

 

mandatory socioeconomic compliance requirements, including labor standards, non-discrimination and affirmative action programs and environmental compliance requirements.

 

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We expect to depend on collaborations with third parties for the development and commercialization of our product candidates. If those collaborations are not successful, we may not be able to capitalize on the market potential of these product candidates.

 

We currently intend to commercialize AGS-003 independently in North America. We intend to collaborate with other third parties to manufacture, develop or commercialize AGS-003 outside North America. We have entered into an exclusive license agreement with Pharmstandard International S.A., or Pharmstandard, for the development and commercialization of AGS-003 in Russia and the other states comprising the Commonwealth of Independent States and an exclusive license agreement with Green Cross Corp., or Green Cross, for the development and commercialization of AGS-003 for the treatment of mRCC in South Korea and an exclusive license agreement with Lummy (Hong Kong) Co. Ltd., or Lummy HK, for the development, manufacture and commercialization of AGS-003 in China, Hong Kong, Taiwan and Macau. We have also entered into a license agreement with Medinet under which we granted Medinet an exclusive license to manufacture in Japan AGS-003 for the purpose of development and commercialization for the treatment of mRCC. We also plan to seek government or other third party funding for continued development of AGS-004 and to collaborate with third parties to develop and commercialize AGS-004. Our likely collaborators for any development, distribution, marketing, licensing or broader collaboration arrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies.

 

Under our existing arrangements we have limited control, and under any additional arrangements we may enter into with third parties we will likely have limited control, over the amount and timing of resources that our collaborators dedicate to the development or commercialization of our product candidates. Our ability to generate revenues from these arrangements will depend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements.

 

Collaborations involving our product candidates would pose the following risks to us:

 

collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;

 

collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborator’s strategic focus or available funding, or external factors such as an acquisition that diverts resources or creates competing priorities;

 

collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or, require a new formulation of a product candidate for clinical testing;

 

collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours;

 

a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing and distribution of such product or products;

 

collaborators may have the right to conduct clinical trials of our product candidates without our consent and could conduct trials with flawed designs that result in data that adversely affect our clinical trials, our ability to obtain marketing approval for our product candidates or market acceptance of our product candidates. Pharmstandard, Green Cross, Medinet and Lummy HK each have this right under our license agreements with them;

 

collaborators may hold rights that could preclude us from commercializing our products in certain territories. For example, we have granted Medinet an exclusive license to manufacture in Japan AGS-003 for the treatment of mRCC. If we and Medinet are unable to agree to the terms of a supply agreement under these circumstances, we will not be able to sell AGS-003 in Japan unless we repurchase these rights from Medinet;

 

collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our proprietary information or expose us to potential litigation;

 

disputes may arise between the collaborators and us that result in the delay or termination of the research, development or commercialization of our products or product candidates or that result in costly litigation or arbitration that diverts management attention and resources; and

 

collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates. For example, our collaboration with Kyowa Hakko Kirin Co., Ltd. with respect to AGS-003 and AGS-004 was terminated by our collaborator.

 

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Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner, or at all. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. If a present or future collaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our product development or commercialization program could be delayed, diminished or terminated.

 

If we are not able to establish additional collaborations, we may have to alter our development and commercialization plans.

 

Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. For some of our product candidates, we intend to collaborate with pharmaceutical and biotechnology companies for the development and commercialization of those product candidates. For example, we have entered into license agreements with third parties to develop, manufacture and/or commercialize AGS-003 in Russia and the other states comprising the Commonwealth of Independent States, South Korea, Japan, China, Hong Kong, Taiwan and Macau, and we intend to collaborate with other third parties to develop and commercialize AGS-003 in other parts of the world and to collaborate with third parties to develop and commercialize AGS-004.

 

We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration, and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate. We may also be restricted under existing license agreements from entering into agreements on certain terms with potential collaborators. Collaborations are complex and time-consuming to negotiate and document. We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all.

 

If we are not able to obtain such funding or enter into collaborations for our product candidate, we may have to curtail the development of such product candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop these product candidates or bring these product candidates to market and generate product revenue.

 

We rely on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.

 

We do not independently conduct clinical trials of our product candidates. We rely on third parties, such as contract research organizations, clinical data management organizations, medical institutions and clinical investigators, to perform this function. Our reliance on these third parties for clinical development activities reduces our control over these activities but does not relieve us of our oversight responsibilities as sponsor of the trial. We remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA and other regulatory authorities require us to comply with standards, commonly referred to as Good Clinical Practice, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. We also are required to register ongoing clinical trials and post the results of certain completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, regulatory approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.

 

For instance, in December 2015 we received a notice from Health Canada that one of the sites at which we are conducting our Phase 3 ADAPT trial in Canada had been found to be non-compliant with Good Clinical Practice in Canada and that if the issues raised in the notice were not corrected, Health Canada could suspend our authorization to conduct the ADAPT trial at all sites in Canada. We submitted a response to Health Canada and subsequently received a Completion of Response notice from Health Canada stating that our corrective actions were satisfactory and that the matter was officially closed.

 

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We also rely on other third parties to store and distribute product supplies for our clinical trials. Any performance failure on the part of our existing or future distributors could delay clinical development or regulatory approval of our product candidates or commercialization of our products, producing additional losses and depriving us of potential product revenue.

 

Risks Related to the Manufacturing of Our Product Candidates

 

We plan to build out a facility to manufacture our Arcelis-based products on a commercial scale. We do not have experience in manufacturing Arcelis-based products on a commercial scale. If, due to our lack of manufacturing experience, we cannot manufacture our Arcelis-based products on a commercial scale successfully or manufacture sufficient product to meet our expected commercial requirements, our business may be materially harmed.

 

We currently have manufacturing suites in our facility located at our corporate headquarters in Durham, North Carolina. We manufacture our Arcelis-based product candidates for research and development purposes and for clinical trials at this facility. In August 2014, we entered into a ten-year lease agreement with renewal options with the developer, TKC LXXII, LLC, or TKC. Under the lease agreement, we agreed to lease certain land and an approximately 125,000 square-foot building to be constructed in Durham County, North Carolina, which we refer to as Centerpoint. We intended this facility to house our corporate headquarters and commercial manufacturing. The shell of the new facility was constructed on a build-to-suit basis in accordance with agreed upon specifications and plans and was completed in June 2015. However, the build-out and equipping of the interior of the facility has not been completed as we explore potential financing arrangements.

 

Under the lease agreement, we had an option to purchase the property. In February 2015, we exercised this purchase option and entered into a Purchase and Sale Agreement with TKC. The purchase price to be paid by us was $7.4 million plus the amount of any additional costs incurred by TKC as a result of changes requested by us, for which we had paid $1.7 million as of October 31, 2016, and the amount of any improvement allowances advanced to us by TKC prior to the closing. Under the terms of the Purchase and Sale Agreement, we had until February 16, 2016 to consummate the purchase of the property. We did not purchase the property by such date. As a result, we have no further right to purchase the property and remain subject to the lease under the Lease Agreement.

 

We continue to explore financing arrangements in connection with the Centerpoint facility. We are also exploring alternatives for the commercial supply of our products. These alternatives include both internal manufacturing solutions as well as potential contractual arrangements with contract manufacturing organizations. We expect that we will enter into arrangements for the commercial manufacture of our products during the fourth quarter of 2016. Under either the Centerpoint option or one of the alternatives, we expect that it will take approximately nine to 12 months to complete the build-out and equipping of a commercial manufacturing facility and that such arrangements would likely involve material obligations. However, other than with respect to our lease with TKC for Centerpoint, we have not entered into any binding arrangement with any party with respect to the lease, build-out and equipping of a manufacturing facility or alternative arrangements for commercial manufacturing, and any potential arrangements have not been finalized and are subject to change. There can be no assurance that we will enter into arrangements on the terms previously available to us, on a timely basis or at all.

 

We plan to initiate commercial manufacturing using our current manual manufacturing process and have decided to complete the development and implementation of our automated manufacturing process after commercial launch. Prior to implementing commercial manufacturing of AGS-003, we would be required to demonstrate that the commercial manufacturing facility is constructed and operated in accordance with current good manufacturing practice. We would also be required to show the comparability between AGS-003 that we produce using the manual processes in our current facility and AGS-003 produced using the manual process in the commercial manufacturing facility.

 

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If we transition to automated manufacturing processes, we expect our automated manufacturing processes will be based on existing functioning prototypes of automated devices for the production of commercial quantities of our Arcelis-based product candidates. These devices can be used to perform substantially all steps required for the manufacture of our Arcelis-based product candidates.

 

We do not have experience in manufacturing products on a commercial scale or using automated processes. In addition, because we are aware of only one company that has manufactured an individualized immunotherapy product for commercial sale, there are limited precedents from which we can learn. We may encounter difficulties in the manufacture of our Arcelis-based products due to our limited manufacturing experience. These difficulties could delay the build-out and equipping of a commercial manufacturing facility and regulatory approval of the manufacture of our Arcelis-based products using the facility, increase our costs or cause production delays or result in us not manufacturing sufficient product to meet our expected commercial requirements, any of which could damage our reputation and hurt our profitability. If we are unable to successfully increase our manufacturing capacity to commercial scale, our business may be materially adversely affected.

 

We need to establish commercial manufacturing operations and augment our manufacturing personnel in advance of any regulatory submission for approval of AGS-003. If we fail to establish commercial manufacturing operations in compliance with regulatory requirements, or augment our manufacturing personnel, we may not be able to initiate commercial operations or produce sufficient product to meet our expected commercial requirements. We have delayed the implementation of our automated manufacturing process and may not be able to use such process on a timely basis or at all.

 

In order to meet our business plan, which contemplates manufacturing our product first using manual processes and later using automated processes for the commercial requirements of AGS-003 and any other Arcelis-based product candidates that might be approved, we plan to lease, build out and equip a commercial manufacturing facility or enter into arrangements with a commercial manufacturing organization and add manufacturing personnel, in advance of any regulatory submission for approval of AGS-003. The planned leasing, build-out and equipping of a commercial manufacturing facility or, alternatively, the build out and equipping of a leased commercial manufacturing facility, will require substantial capital expenditures and additional regulatory approvals. In addition, it will be costly and time consuming to recruit necessary additional personnel.

 

If we are unable to successfully build out and equip a commercial manufacturing facility or enter into arrangements with a commercial manufacturing organization in compliance with regulatory requirements or hire and train additional necessary manufacturing personnel appropriately, our filing for regulatory approval of AGS-003 may be delayed or denied.

 

We plan to delay the implementation of our automated manufacturing process until we obtain additional funding, and thus plan to seek approval of AGS-003 and, if approved, to initially commercially supply AGS-003 using manual manufacturing processes. Prior to implementing commercial manufacturing of AGS-003, we will be required to demonstrate that the commercial manufacturing facility is constructed and operated in accordance with current Good Manufacturing Practice, or cGMP. We will also be required to show the comparability between AGS-003 that we produce using the manual processes in our current facility and AGS-003 produced using the manual process in the new facility.

 

Our implementation of automated processes could take longer, particularly if we are unable to achieve any of the required tasks on a timely basis, or at all. We are collaborating with Invetech Pty Ltd., or Invetech, and Saint-Gobain Performance Plastics Corporation, or Saint-Gobain, to develop the equipment and disposables necessary to implement the automated manufacturing processes for Arcelis-based products. If Invetech or Saint-Gobain do not perform as expected under the agreements or the projects with Invetech or Saint-Gobain are unsuccessful for any other reason, our timelines for the implementation of our automated manufacturing processes could be further delayed and our business could be adversely affected.

 

Prior to implementing the automated manufacturing processes for Arcelis-based products, we will be required to:

 

demonstrate that the disposable components and sterilization and packaging methods used in the manufacturing process are suitable for use in manufacturing in accordance with current good manufacturing practice, or cGMP, and current Good Tissue Practices, or cGTP;

 

build and validate processing equipment that complies with cGMP and cGTP;

 

equip a commercial manufacturing facility to accommodate the automated manufacturing process;

 

perform process testing with final equipment, disposable components and reagents to demonstrate that the methods are suitable for use in cGMP and cGTP manufacturing;

 

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demonstrate consistency and repeatability of the automated manufacturing processes in the production of AGS-003 in our new facility to fully validate the manufacturing and control process using the actual automated cGMP processing equipment; and

 

demonstrate comparability between AGS-003 that we produce using our manual processes and AGS-003 produced using the automated processes.

 

We will need regulatory approval to use the automated manufacturing processes for commercial purposes. If the FDA requires us to conduct a bridging study to demonstrate comparability between AGS-003 that we produce manually and AGS-003 produced using the automated processes, the implementation of the automated manufacturing processes and the filing for such approval will likely be delayed.

 

If we are unable to successfully implement the automated processes required and demonstrate comparability between the AGS-003 that we produce manually and the AGS-003 produced using the automated processes, our filing for regulatory approval of the commercial use of our automated manufacturing processes may be delayed or denied and we may not be able to initiate commercial manufacturing using our automated manufacturing processes. In such event, our commercial manufacturing costs will be higher than anticipated and we may not be able to manufacture sufficient product to meet our expected commercial requirements.

 

Lack of coordination internally among our employees and externally with physicians, hospitals and third- party suppliers and carriers, could cause manufacturing difficulties, disruptions or delays and cause us to not have sufficient product to meet our expected clinical trial requirements or potential commercial requirements.

 

Manufacturing our Arcelis-based product candidates requires coordination internally among our employees and externally with physicians, hospitals and third party suppliers and carriers. For example, a patient’s physician or clinical site will need to coordinate with us for the shipping of a patient’s disease sample and leukapheresis product to our manufacturing facility in a timely manner, and we will need to coordinate with them for the shipping of the manufactured product to them. Such coordination involves a number of risks that may lead to failures or delays in manufacturing our Arcelis-based product candidates, including:

 

failure to obtain a sufficient supply of key raw materials of suitable quality;

 

difficulties in manufacturing our product candidates for multiple patients simultaneously;

 

difficulties in obtaining adequate patient-specific material, such as tumor samples, virus samples or leukapheresis product, from physicians;

 

difficulties in completing the development and validation of the specialized assays required to ensure the consistency of our product candidates;
   
failure to ensure adequate quality control and assurances in the manufacturing process as we increase production quantities;

 

difficulties in the timely shipping of patient-specific materials to us or in the shipping of our product candidates to the treating physicians due to errors by third party carriers, transportation restrictions or other reasons;

 

destruction of, or damage to, patient-specific materials or our product candidates during the shipping process due to improper handling by third party carriers, hospitals, physicians or us;

 

destruction of, or damage to, patient-specific materials or our product candidates during storage at our facilities; and

 

destruction of, or damage to, patient-specific materials or our product candidates stored at clinical and future commercial sites due to improper handling or holding by clinicians, hospitals or physicians.

 

If we are unable to coordinate appropriately, we may encounter delays or additional costs in achieving our clinical and commercialization objectives, including in obtaining regulatory approvals of our product candidates and supplying product, which could materially damage our business and financial position.

 

If our existing manufacturing facility or any commercial manufacturing facility that we are using is damaged or destroyed, or production at one of these facilities is otherwise interrupted, our business and prospects would be negatively affected.

 

We currently have a single manufacturing facility and expect that the commercial manufacturing facility that we plan to build out and equip will be our only commercial manufacturing facility in North America. If our existing manufacturing facility or any new commercial manufacturing facility or the equipment in either of these facilities, is damaged or destroyed, we likely would not be able to quickly or inexpensively replace our manufacturing capacity and possibly would not be able to replace it at all. Any new facility needed to replace either our existing manufacturing facility or a new commercial manufacturing facility would need to comply with the necessary regulatory requirements, need to be tailored to our specialized automated manufacturing requirements and require specialized equipment. We would need FDA approval before selling any products manufactured at a new facility. Such an event could delay our clinical trials or, if any of our product candidates are approved by the FDA, reduce or eliminate our product sales.

 

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We maintain insurance coverage to cover damage to our property and equipment and to cover business interruption and research and development restoration expenses. If we have underestimated our insurance needs with respect to an interruption in our clinical manufacturing of our product candidates, we may not be able to adequately cover our losses.

 

Risks Related to Our Intellectual Property

 

If we fail to comply with our obligations under our intellectual property licenses with third parties, we could lose license rights that are important to our business.

 

We are a party to a number of intellectual property license agreements with third parties, including with respect to each of AGS-003 and AGS-004, and we expect to enter into additional license agreements in the future. Our existing license agreements impose, and we expect that future license agreements will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. For example, under our license agreement with Duke University which relates to patents and patent applications directed towards the composition of matter of Arcelis-based products, dendritic cells loaded with RNA from tumors or pathogens, methods of manufacture of these products and methods of using these products to treat tumors, we are required to use commercially reasonable efforts to research, develop and market license products and to satisfy other specified obligations. If we fail to comply with our obligations under these licenses, our licensors may have the right to terminate these license agreements, in which event we might not be able to market any product that is covered by these agreements, or to convert the license to a non-exclusive license, which could materially adversely affect the value of the product candidate being developed under the license agreement. Termination of these license agreements or reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorable terms.

 

If we are unable to obtain and maintain patent protection for our technology and products, or if our licensors are unable to obtain and maintain patent protection for the technology or products that we license from them, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and products may be adversely affected.

 

Our success depends in large part on our and our licensors’ ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary technology and products. We and our licensors have sought to protect our proprietary position by filing patent applications in the United States and abroad related to our novel technologies and products that are important to our business. This process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development efforts before it is too late to obtain patent protection. Moreover, in some circumstances, we do not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology or products that we license from third parties and are reliant on our licensors. Therefore, we cannot be certain that these patents and applications will be prosecuted and enforced in a manner consistent with the best interests of our business. If such licensors fail to maintain such patents, or lose rights to those patents, the rights we have licensed may be reduced or eliminated.

 

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our and our licensors’ patent rights are highly uncertain. Our and our licensors’ pending and future patent applications may not result in patents being issued which protect our technology or products or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection.

 

Third parties could practice our inventions in territories where we do not have patent protection. Furthermore, the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. For example, we own or exclusively license patents relating to our process of manufacturing an individualized drug product. A U.S. patent may be infringed by anyone who, without authorization, practices the patented process in the United States or imports a product made by a process covered by the U.S. patent. In foreign countries, however, importation of a product made by a process patented in that country may not constitute an infringing activity, which would limit our ability to enforce our process patents against importers in that country. Furthermore, the legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property rights. If competitors are able to use our technologies, our ability to compete effectively could be harmed.

 

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Furthermore, publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore we cannot be certain that we or our licensors were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we or our licensors were the first to file for patent protection of such inventions.

 

Assuming the other requirements for patentability are met, in the United States, the first to invent the claimed invention is entitled to the patent, while outside the United States, the first to file a patent application is generally entitled to the patent. Under the America Invents Act, or AIA, enacted in September 2011, the United States moved to a first inventor to file system in March 2013. The United States Patent and Trademark Office only recently finalized the rules relating to these changes and courts have yet to address the new provisions. These changes could increase the costs and uncertainties surrounding the prosecution of our patent applications and the enforcement or defense of our patent rights. Furthermore, we may become involved in interference proceedings, opposition proceedings, or other post-grant proceedings, such as reissue, reexamination or inter partes review proceedings, which may challenge our patent rights or the patent rights of others. An adverse determination in any such proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third party patent rights.

 

Even if our owned and licensed patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner. The issuance of a patent is not conclusive as to its scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to or stop or prevent us from stopping others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. For example, certain of the U.S. patents we exclusively license from Duke University expired in 2016 and the European and Japanese patents exclusively licensed from Duke University expire in 2017. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

 

We may become involved in lawsuits to protect or enforce our patents, which could be expensive, time consuming and unsuccessful.

 

Competitors may infringe our patents. To counter such infringement or unauthorized use, we may be required to file infringement claims against third parties, which can be expensive and time consuming. In addition, during an infringement proceeding, a court may decide that the patent rights we are asserting are invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, our licensors may have rights to file and prosecute such claims and we are reliant on them.

 

Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.

 

Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. We cannot ensure that third parties do not have, or will not in the future obtain, intellectual property rights such as granted patents that could block our ability to operate as we would like. There may be patents in the United States or abroad owned by third parties that, if valid, may block our ability to make, use or sell our products in the United States or certain countries outside the United States, or block our ability to import our products into the United States or into certain countries outside the United States.

 

We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology. For example, third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future. If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from such third party to continue developing and marketing our products and technology. However, we may be unable to obtain any required license on commercially reasonable terms or even obtain a license at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.

 

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We have research licenses to certain reagents and their use in the development of our product candidates. We would need commercial licenses to these reagents for any of our product candidates that receive approval for sale in the United States. We believe that commercial licenses to these reagents will be available. However, if we are unable to obtain any such commercial licenses, we may be unable to commercialize our product candidates without infringing the patent rights of third parties. If we did seek to commercialize our product candidates without a license, these third parties could initiate legal proceedings against us.

 

We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

 

Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

 

Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.

 

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

 

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

 

In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. The types of protections available for trade secrets are particularly important with respect to our Arcelis platform’s manufacturing capabilities, which involve significant unpatented know-how. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, sponsored researchers, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.

 

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Risks Related to Legal Compliance Matters

 

Any product candidate for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products, when and if any of them are approved.

 

Any product candidate for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, cGTP requirements, requirements regarding the distribution of samples to physicians and recordkeeping. Even if regulatory approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. The FDA closely regulates the post-approval marketing and promotion of drugs to ensure drugs are marketed only for the approved indications and in accordance with the provisions of the approved label. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we do not market our products for their approved indications, we may be subject to enforcement action for off-label marketing. In addition, later discovery of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

 

restrictions on such products, manufacturers or manufacturing processes;

 

restrictions on the marketing of a product;

 

restrictions on product distribution;

 

requirements to conduct post-marketing clinical trials;

 

warning or untitled letters;

 

withdrawal of the products from the market;

 

refusal to approve pending applications or supplements to approved applications that we submit;

 

recall of products;

 

fines, restitution or disgorgement of profits or revenue;

 

suspension or withdrawal of regulatory approvals;

 

refusal to permit the import or export of our products;

 

product seizure; or

 

injunctions or the imposition of civil or criminal penalties.

  

Our relationships with customers and third party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, program exclusion, contractual damages, reputational harm and diminished profits and future earnings.

 

Healthcare providers, physicians and third party payors play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing approval. Our future arrangements with third party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations, include the following:

 

the federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal and state healthcare programs such as Medicare and Medicaid;

 

the federal False Claims Act imposes civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

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the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;

 

the federal transparency requirements under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or the Health Care Reform Law will require manufacturers of drugs, devices, biologics and medical supplies to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests; and

 

analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures.

 

Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and may require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures. State and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, thus complicating compliance efforts.

 

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

 

Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain.

 

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any product candidates for which we obtain marketing approval.

 

In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or Medicare Modernization Act, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for physician administered drugs. In addition, this legislation provided authority for limiting the number of drugs that will be covered in any therapeutic class in certain cases. Cost reduction initiatives and other provisions of this and other more recent legislation could decrease the coverage and reimbursement that is provided for any approved products. While the Medicare Modernization Act applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the Medicare Modernization Act or other more recent legislation may result in a similar reduction in payments from private payors.

 

In March 2010, President Obama signed into law the Health Care Reform Law, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for health care and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Effective October 1, 2010, the Health Care Reform Law revises the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates to states. Further, the new law imposes a significant annual fee on companies that manufacture or import branded prescription drug products. Substantial new provisions affecting compliance have also been enacted, which may affect our business practices with health care practitioners. We will not know the full effects of the Health Care Reform Law until applicable federal and state agencies issue regulations or guidance under the new law. Although it is too early to determine the effect of the Health Care Reform Law, the new law appears likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.

 

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Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.

 

With the enactment of the Biologics Price Competition and Innovation Act of 2009, or BPCIA, as part of the Health Care Reform Law, an abbreviated pathway for the approval of biosimilar and interchangeable biological products was created. The new abbreviated regulatory pathway establishes legal authority for the FDA to review and approve biosimilar biologics, including the possible designation of a biosimilar as “interchangeable” based on its similarity to an existing brand product. Under the BPCIA, an application for a biosimilar product cannot be submitted to the FDA until four years, or approved by the FDA until 12 years, after the original brand product identified as the reference product was approved under a BLA. The new law is complex and is only beginning to be interpreted and implemented by the FDA. As a result, its ultimate impact, implementation and meaning is subject to uncertainty. While it is uncertain when any such processes may be fully adopted by the FDA, any such processes could have a material adverse effect on the future commercial prospects for our biological products.

 

We believe that if any of our product candidates were to be approved as biological products under a BLA, such approved products should qualify for the four-year and 12-year periods of exclusivity. However, there is a risk that the U.S. Congress could amend the BPCIA to significantly shorten these exclusivity periods as proposed by President Obama, or that the FDA will not consider our product candidates to be reference products for competing products, potentially creating the opportunity for generic competition sooner than anticipated. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.

 

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

 

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and radioactive and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.

 

Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials.

 

In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

 

Risks Related to Employee Matters and Managing Growth

 

Our future success depends on our ability to retain our chief executive officer and other key executives and to attract, retain and motivate qualified personnel.

 

We are highly dependent on Jeffrey Abbey, our President and Chief Executive Officer, Charles Nicolette, our Vice President of Research and Development and Chief Scientific Officer, Lee F. Allen, our Chief Medical Officer and Richard Katz, our Vice President and Chief Financial Officer, as well as the other principal members of our management and scientific teams. Although we have formal employment agreements with each of our executive officers, these agreements do not prevent our executives from terminating their employment with us at any time. We do not maintain “key person” insurance for any of our executives or other employees. The loss of the services of any of these persons could impede the achievement of our research, development and commercialization objectives.

 

Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

 

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We expect to expand our development, regulatory, manufacturing and sales and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

 

We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug development, regulatory affairs, manufacturing and sales and marketing. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.

 

Risks Related to Our Common Stock

 

Our executive officers, directors and affiliates of all officers and directors who own our outstanding common stock maintain the ability to control all matters submitted to stockholders for approval.

 

Our executive officers, directors and affiliates of our executive officers and directors beneficially own, in the aggregate, shares representing approximately 61.49% of our outstanding common stock as of November 7, 2016. As a result, if these stockholders were to choose to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire.

 

Our largest stockholder, Pharmstandard, could exert significant influence over us and could limit your ability to influence the outcome of key transactions, including any change of control.

 

Our largest stockholder, Pharmstandard, beneficially owns, in the aggregate, shares representing approximately 39.60% of our outstanding common stock as of November 7, 2016. In addition, two members of our board of directors are affiliates of Pharmstandard. As a result, we expect that Pharmstandard will be able to exert significant influence over our business. Pharmstandard may have interests that differ from your interests, and it may vote in a way with which you disagree and that may be adverse to your interests. The concentration of ownership of our capital stock may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and may adversely affect the market price of our common stock.

 

Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

 

Provisions in our corporate charter and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:

 

establish a classified board of directors such that not all members of the board are elected at one time;

 

allow the authorized number of our directors to be changed only by resolution of our board of directors;

 

limit the manner in which stockholders can remove directors from the board;

 

establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors;

 

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require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;

 

limit who may call stockholder meetings;

 

authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and

 

require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our charter or bylaws.

 

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

 

An active trading market for our common stock may not be sustained.

 

Although our common stock is listed on The NASDAQ Global Market, an active trading market for our shares may not be sustained. If an active market for our common stock is not sustained, it may be difficult for you to sell your shares without depressing the market price for the shares or sell your shares at all. Any inactive trading market for our common stock may also impair our ability to raise capital to continue to fund our operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

 

If our stock price continues to be volatile, purchasers of our common stock could incur substantial losses.

 

Our stock price is likely to be volatile. For example, our stock has traded in a range from a low of $1.61 and high of $13.97 during the period of February 7, 2014 through November 7, 2016. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our common stock may be influenced by many factors, including:

 

our cash resources;

 

results of clinical trials of our product candidates or those of our competitors;

 

the success of competitive products or technologies;

 

potential approvals of our product candidates for marketing by the FDA or equivalent foreign regulatory authorities or our failure to obtain such approvals;

 

regulatory or legal developments in the United States and other countries;

 

the results of our efforts to commercialize our product candidates;

 

developments or disputes concerning patents or other proprietary rights;

 

the recruitment or departure of key personnel;

 

the level of expenses related to any of our product candidates or clinical development programs;

 

the results of our efforts to discover, develop, acquire or in-license additional product candidates or products;

   

actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;

 

variations in our financial results or those of companies that are perceived to be similar to us;

 

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changes in the structure of healthcare payment systems;

 

market conditions in the pharmaceutical and biotechnology sectors and issuance of new or changed securities analysts’ reports or recommendations;

 

general economic, industry and market conditions; and

 

the other factors described in this “Risk Factors” section.

 

We will continue to incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financial reporting. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 of the Sarbanes-Oxley Act of 2002 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

 

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act, and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and plan to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In our 2015 Annual Report on Form 10-K, we did not include all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.

 

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In September 2014, we entered into a venture loan and security agreement with Horizon and Fortress. The terms of this agreement preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. 

 

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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.

 

The trading market for our common stock will depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us, or provide favorable coverage. If one or more analysts downgrade our stock or change their opinion of our stock to be less favorable, our share price would likely decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

 

Item 6. Exhibits

 

The exhibits filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index immediately following the signatures page of this Quarterly Report on Form 10-Q and are incorporated herein by reference.

 

 

 

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

ARGOS THERAPEUTICS, INC.  
     
By: /s/ Jeffrey D. Abbey  
  Name: Jeffrey D. Abbey  
  Title: President and Chief Executive Officer

 

Date: November 14, 2016

 

 

 

 

 

 

 

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EXHIBIT INDEX

 

Exhibit

Number

  Description of Exhibit
     
     
4.1+  

Form of Warrant Agreement by and among the Registrant and Computershare Inc. and Computershare Trust Company, N.A. (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 001-35443) on July 29, 2016 and incorporated herein by reference)

     

4.2+

 

Amendment No. 2 to Fifth Amended and Restated Registration Rights Agreement, dated July 14, 2016 (amending the Registrant’s Fifth Amended and Restated Registration Rights Agreement, dated August 9, 2013) (filed as Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35443) on August 15, 2016 and incorporated herein by reference)

     

10.2+#

 

Employment Agreement between the Registrant and Richard D. Katz, dated July 1, 2016 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-35443) on July 11, 2016 and incorporated herein by reference)

     

10.3+

 

Fifth Amendment to Lease Agreement and Third Amendment to Purchase and Sale Agreement, dated as of July 1, 2016 amending that certain Lease Agreement, dated August 18, 2014, by and between the Registrant and TKC LXXII, LLC and that certain Purchase and Sale Agreement, dated February 16, 2015, by and between the Registrant and TKC LXXII, LLC (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35443) on August 15, 2016 and incorporated herein by reference)

     
10.4*   Sixth Amendment to Lease Agreement and Fourth Amendment to Purchase and Sale Agreement, dated as of September 30, 2016 amending that certain Lease Agreement, dated August 18, 2014, by and between the Registrant and TKC LXXII, LLC and that certain Purchase and Sale Agreement, dated February 16, 2015, by and between the Registrant and TKC LXXII, LLC
     
31.1*   Certification of principal executive officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2*   Certification of principal financial officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1*   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, by the Registrant’s principal executive officer and principal financial officer
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.
+ Previously filed.
# Management contract or compensatory plan arrangement.

 

 

 

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Exhibit 10.4

 

 

SIXTH AMENDMENT TO LEASE AGREEMENT AND FIFTH

AMENDMENT TO PURCHASE AND SALE AGREEMENT

 

THIS SIXTH AMENDMENT TO LEASE AGREEMENT AND FIFTH AMENDMENT TO PURCHASE AND SALE AGREEMENT (this “ Agreement ”), is dated effective as of September 30, 2016 (the “Effective Date”), by and between TKC LXXII, LLC , a North Carolina limited liability company (“ TKC ”), and ARGOS THERAPEUTICS, INC. , a Delaware corporation (“ Argos ” and together with TKC, collectively, the “ Parties ”).

 

RECITALS :

 

A.       TKC, as landlord, and Argos, as tenant, are parties to that certain Lease Agreement, dated as of August 18, 2014 (as amended by that certain First Amendment to Lease Agreement effective September 10, 2014, that certain Second Amendment to Lease Agreement effective September 17, 2014, that certain Third Amendment to Lease Agreement effective January 31, 2015, that certain Fourth Amendment to Lease Agreement effective June 25, 2015, and that certain Fifth Amendment to Lease Agreement and Third Amendment to Purchase and Sale Agreement dated as of July 1, 2016, collectively, the “ Lease Agreement ”), for those certain improvements (the “ Improvements ”) now and hereafter erected on that certain approximately 11.135 acre parcel of property located in Durham County, North Carolina (the “ Property ”) as such Improvements and Property are more particularly defined in the Lease Agreement.

 

B.       TKC, as seller, and Argos, as buyer, are also parties to that certain Purchase and Sale Agreement dated as of February 16, 2015 (as amended by that certain Fourth Amendment to Lease Agreement effective June 25, 2015, that certain Second Amendment to Purchase and Sale Agreement effective November 25, 2015, that certain Fifth Amendment to Lease Agreement and Third Amendment to Purchase and Sale Agreement dated as of July 1, 2016 and that certain Fourth Amendment to Purchase and Sale Agreement dated effective as of September 23, 2016 (the “ Fourth Amendment ”), collectively, the “ Purchase Agreement ”) pursuant to which TKC agreed to sell the Property to Argos, and Argos agreed to purchase the Property from TKC, on the terms set forth therein.

 

C.       Argos has (i) informed TKC that Argos is unable to consummate the Closing (as defined in the Purchase Agreement) on or before September 30, 2016 as contemplated by the Fourth Amendment, and (ii) requested that the Parties amend the Purchase Agreement to allow for the Closing Date (as defined in the Purchase Agreement) to occur, if at all, at Argos’s option on or before October 31, 2016.

 

D.       The Parties desire to amend each of the Lease Agreement and the Purchase Agreement as set forth herein.

 

AGREEMENT :

 

NOW, THEREFORE , in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:

 

1.        Consideration for TKC’s Extension of Option to Close; Purchase Price .

 

(a)       The Parties acknowledge and agree that TKC has received three deposits (collectively, the “ Delivered Deposits ”) from Argos in connection with the Purchase Agreement as follows: (i) the first in the amount of $381,033 delivered on or about February 16, 2015; (ii) the second in the amount of $100,000 delivered on or about January 15, 2016, and (iii) an additional deposit of $49,000 delivered on or about July 2, 2016.

 

 

(b)       As a condition precedent to the effectiveness of this Agreement, (x) a counterpart of this Agreement shall be executed by Argos and delivered by Argos to TKC on or before October 3, 2016 and (y) Argos shall make a payment to TKC (on or before October 5, 2016) in immediately available funds in the amount of $150,000.00 (the “ Additional Payment ”).

 

(c)       The Parties acknowledge and agree that, notwithstanding anything to the contrary contained in either the Lease Agreement or the Purchase Agreement, the Delivered Deposits and the Additional Payment shall serve as consideration to TKC for TKC’s agreement to amend the Lease Agreement and the Purchase Agreement to, inter alia , provide Argos with an option to purchase the Property at a later date on the terms set forth herein. Argos further acknowledges and agrees that: (i) the Delivered Deposits and the Additional Payment are forfeited to TKC as of the Effective Date (defined below) as consideration for TKC’s extension of the option to purchase; (ii) notwithstanding anything to the contrary contained in either the Lease Agreement or the Purchase Agreement, neither the Delivered Deposits nor the Additional Payment may be used at Closing to reduce the Purchase Price (each as defined in the Purchase Agreement) except that if the closing occurs on or before October 7, then $135,000 of the Additional Payment shall be applied to reduce the Purchase Price; and (iii) the Delivered Deposits and the Additional Payment shall be fully earned by TKC and non-refundable as of the Effective Date.

 

(d)       The Parties further acknowledge and agree that the Purchase Price (as defined in the Purchase Agreement) is Seven Million Three Hundred Ninety Thousand and No/100 DOLLARS ($7,390,000.00).

 

(e)       The Parties also agree that except as set forth in the Purchase Agreement, Argos has no right to purchase the Property and the purchase option contained in the Lease is null and void.

 

(f)       As further consideration for TKC’s agreement to extend the outside date for Closing to October 31, 2016 pursuant to the Purchase Agreement, the Parties agree that the Lease is amended to provide that the Reduced Allowance (as defined in the Lease) in the amount of $206,500 shall not be payable to Argos unless and until Argos closes on the purchase of the Property pursuant to the Purchase Agreement on or before October 31, 2016 and if Argos fails to close on the purchase of the Property on or before October 31, 2016 for any reason other than a default by TKC of its obligation to close, then the Reduced Allowance shall not be payable by TKC and Argos shall have no right whatsoever to receive the Reduced Allowance.

 

(g) The Parties agree that Section 5 of the Purchase Agreement is amended and restated in its entirety as follows:

 

“SECTION 5. Closing. The consummation of the transactions contemplated hereby shall be held at the offices of Escrow Agent or by mail, or at such other place as the parties may mutually agree. As used in this Agreement, “Closing” means the delivery of the deed to Buyer, the delivery of the other closing documents described in Section 7 hereunder and the delivery of the Purchase Price to Seller. The date of the Closing shall be selected by the Buyer but shall occur not later than October 31, 2016, time being of the essence and the parties agree that the Closing shall be effected through the Escrow Agent and the physical presence at Closing shall not be required by either representatives of Buyer or Seller. The date on which the Closing occurs is referred to herein as the “Closing Date”.

 

2  

 

2.        Effectiveness . This Agreement shall become effective as of the Effective Date when, and only when, each of the following conditions shall have been satisfied or waived, in the sole discretion of TKC:

 

(a)       TKC shall have received counterparts of this Agreement duly executed by each of TKC and Argos.

 

(b)       TKC shall have received the Additional Payment.

 

 

3.        Conditions Precedent and Closing Documents . Argos acknowledges and agrees that as of the date hereof all of TKC’s obligations under the Lease and the Purchase Agreement have been satisfied and that all of the conditions to be satisfied by TKC under the Lease and the Purchase Agreement prior to the Closing have been satisfied. Argos acknowledges and agrees that TKC has delivered all of the documents to be delivered by TKC at Closing under the Purchase Agreement to Escrow Agent and such documents are in form and substance satisfactory to Argos.

 

4.        Ratification; Miscellaneous; Assignment . Time is of the essence with respect to all of the obligations of the Parties under this Agreement. Each of the Lease Agreement and the Purchase Agreement, as amended by this Agreement, shall remain enforceable in accordance with its terms. Terms and provisions of either the Lease Agreement or the Purchase Agreement that are not expressly modified by this Agreement shall remain in full force and effect. As amended by this Agreement, all of the terms, conditions and provisions of each of the Lease Agreement and the Purchase Agreement are hereby ratified and affirmed in all respects. To the extent any terms, conditions and obligations contained in this Agreement conflict with the terms in either the Lease Agreement or the Purchase Agreement, those in this Agreement shall control. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the signatories hereto may execute this Agreement by signing any such counterpart. Notwithstanding any contrary provision in the Purchase Agreement, the Purchase Agreement may be assigned by Buyer without the consent of Seller.

 

[SIGNATURE PAGE TO FOLLOW]

3  

 

IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the day and year first above written.

 

 

  TKC:
     
  TKC LXXII, LLC ,
a North Carolina limited liability company
     
     
  By: /s/ Kenneth R. Beuley
    Kenneth R. Beuley, Authorized Member
     
     
  ARGOS:
   
  ARGOS THERAPEUTICS, INC. ,
a Delaware corporation
   
   
  By: /s/ Jeff Abbey
  Name: Jeff Abbey
  Title: President and CEO

 

 

 

 

Exhibit 31.1

 

CERTIFICATIONS

 

I, Jeffrey D. Abbey, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Argos Therapeutics, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 14, 2016    
       
  By: /s/ JEFFREY D. ABBEY  
    Jeffrey D. Abbey  
    President and Chief Executive Officer
    (Principal Executive Officer)

Exhibit 31.2

 

CERTIFICATIONS

 

I, Richard D. Katz, M.D., certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Argos Therapeutics, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 14, 2016    
       
  By:  /s/ RICHARD D. KATZ, M.D.  
    Richard D. Katz, M.D.  
    Vice President and Chief Financial Officer
    (Principal Financial Officer)  

Exhibit 32.1

 

 

CERTIFICATIONS PURSUANT TO 18 U.S.C. 1350

 

The undersigned, the Chief Executive Officer and the Vice President and Chief Financial Officer of Argos Therapeutics, Inc. (the “Company”), each hereby certifies that, to his/her knowledge on the date hereof:

 

(a) the Quarterly Report on Form 10-Q of the Company for the period ended September 30, 2016 filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

  By: /s/ JEFFREY D. ABBEY  
    Jeffrey D. Abbey  
Chief Executive Officer  
November 14, 2016  
       
  By: /s/ RICHARD D. KATZ, M.D.  
    Richard D. Katz, M.D.  
Vice President and Chief Financial Officer
November 14, 2016